Chapter 1 Limits,Alternative and choices Resources (ปจจยในการผลต)
=Factor of Production = Input
4 categories of resources
1.Land –all natural resoruces = ทรพยากรธรรมชาต
2.Labor –physical and mental activities that people =แรงงาน
3.Capital –all manufactured aid used in producing goods and services =เครองจกร
4.Entrepreneur ability –special human resource (skill)
- Entrepreneur Functions หนาทของผประกอบการ
1) Take initiative
2) Make decisions
3) Innovates
4) Take risk, be risk taker
Two types of goods :
Consumer Goods:
-Goods that satisfy want directly. =ตอบสนองความตองการผบรโภค ทางตรง
-Goods for present consumption
Capital Goods:
-Goods that satisfy wants indirectly by aiding the production of consumer goods. ตอบสนองความตองการผบรโภค ทางออม
-Goods for future consumption
-----------------------------Economics defined :
• Economic wants exceed productive capacity.
• A social science concerned with how individuals, insyitutions and society making optimal choices under
conditions of scarcity.(ÈศÕี¡กÉษÒา¡กÒาÃรµตÑั´ดÊสÔิ¹นãใ¨จ¢ขÍอ§ง¤ค¹นãใ¹นÊสÑั§ง¤คÁม àเ¹น×ืè่Íอ§ง¨จÒา¡ก·ทÃรÑั¾พÂยÒา¡กÃรÁมÕี¨จíํÒา¡กÑั´ด)
The Economic Perspective
• Thinking like an economist
• Key features:
Scarcity and choice
-Resources are scarce(limited goods &service)
-Choices must be made
@Opportunity cost (¤ค‹‹ÒาàเÊสÕีÂยâโÍอ¡กÒาÊส) àThere’’s no free lunch= nothing free!
To obtain one more things society forgoes the opportunity of getting the next best thing.
When society uses resource to produce something, it sacrifices other goods
Purposeful behavior (¾พÄฤµตÔิ¡กÃรÃรÁม¢ขÍอ§ง¼ผÙูŒŒºบÃรÔิâโÀภ¤ค ÁมÕี¨จØุ´ด»ปÃรÐะÊส§ง¤ค)
-Economic decisions are ‘‘purposeful’’ or ‘‘rational(ÁมÕีàเËหµตØุ¼ผÅล)’’
-Human behavior reflects ‘‘ Rational self-interest ’’
=Purposeful behavior means ““people makes decision with some desired outcome in mind””
-Individuals and utility
@Utility =Satisfaction, Pleasure or Happiness, obtained from consuming goods & service.
Individuals allocate time, energy and money to maximize their ““satisfaction””
-Firms and profit
-Desired outcomes
Marginal analysis (¼ผÙูŒŒºบÃรÔิâโÀภ¤ค¨จÐะàเ»ปÃรÕีÂยºบàเ·ทÕีÂยºบ ¢ขŒŒÍอ´ดÕีáแÅลÐะ¢ขŒŒÍอàเÊสÕีÂย ¡ก‹‹Íอ¹นµตÑั´ดÊสÔิ¹น)
-Individuals weights and costs
-Comparison of marginal benefits(MB) and marginal costs(MC) for decision making.
@Marginal = additional, incremental, extra or change in status quo = àเ¾พÔิè่Áม¢ขÖึé้¹น
Marginal benefit=addition benefit when consume one more unit of goods & service
Marginal Cost= addition cost when consume one more unit of goods & service
MB>MC àBuy
benefit>cost
MB<MC ànot BUY
Theory, Principle, and Models
• The scientific method:
, • Economic principles àanalyzing economic behavior=ãใªชŒŒãใ¹น¡กÒาÃรÇวÔิàเ¤คÃรÒาÐะËห àเÈศÃรÉษ°ฐ¡กÔิ¨จ
• Generalizations
-Economic principles are generalizations relating to economic behavior or the economic
itself EX. Price-Quantity
• Other-things-equal assumption(CETERIS PARIBUS)
-Assume that factors other than those being considered do not change.
-Helpful because economist can focus on relationship between two variables.
• Graphical expression
-Economic model are expressed graphically.
Microeconomics & Macroeconomics
# Microeconomics
• Decision making by individual units
# Macroeconomics
• measures total output, total income, and aggregate expenditure.
• Examine either the economy as a whole or the aggregate.
Positive and Normative Economics
@ Positive economics
• Deals with economic facts.
• Focus on facts and cause and effect relationship WITHOUT value judgment.
@ Normative economics
• A subjective perspective of the economy.
• Incorporate value judgment about what the economy SHOULD like.
Budget line
= A curve or a schedule that shows various combinations of two products a consumer can purchase with a
specific money income. (àเÊสŒŒ¹นáแÊส´ด§ง¨จíํÒา¹นÇว¹นÊสÔิ¹น¤คŒŒÒา·ทÕีè่«ซ×ืé้Íอäไ´ดŒŒ ¨จÒา¡กàเ§งÔิ¹น·ทÕีè่ÁมÕีÍอÂยÙู‹‹¨จíํÒา¡กÑั´ด)
• Attainable and unattainable options
Maximum X= Income/ price X • Tradeoffs and opportunity costs
Maximum Y= Income / price Y Income = (Py x Qy)+(Px x Qx)
• Make the best choice possible
• Straight-line, Downward sloping, Constant slope
• Sloping of budget line = -Px/Py
• Income Change
-Income à can consume both goods àBudget line shift to the RIGHT
Production Possibilities Model
• Assumptions:
• Full employment of resource =ãใªชŒŒ·ทÃรÑั¾พÂยÒา¡กÃร·ทÑัé้§งËหÁม´ด ÍอÂย‹‹Òา§งàเµตÁมç็ ·ทÕีè่
• Fixed supply of resources =»ปÃรÔิÁมÒา³ณ áแÅลÐะ¤คØุ³ณÀภÒา¾พ ¤ค§ง·ทÕีè่
• Fixed technology
=technology ¤ค§ง·ทÕีè่
• Two goods in economy
=consumer goods & capital goods
Production Possibilities Curve(PPC)
-A curve displays the different combinations of goods and services that society can
produce in a fully employed economy.
-Each point on PPCàmaximum output of the two products society.
-PPC is a constraint because it shows the limit of attainable outputs.
-The law of increasing opportunity costs makes the PPC concave. (bow out)
-Capital goods(Y-axis),Consumer goods(X-axis)
Optimal Allocation (optimal output=best output)
-Compare between MB&MC
-Produce until point MB=MC
EX. At point b: MB=$15
MC=$5 output=10 units ,MB>MCà must approve output
At point e: MB,MC=$20 MB=MCàbest,optimal allocation of resource
A Growing Economy
-PPC expands outward à¼ผÅลÔิµตäไ´ดŒŒÁมÒา¡ก¢ขÖึé้¹น·ทÑัé้§งÊสÍอ§งáแºบºบ(consumer &capital goods)
• Economic Growth
• More(quantity) resources =»ปÃรÔิÁมÒา³ณ resource
• Improved resource quality =¤คØุ³ณÀภÒา¾พ resource
• Technological advances =¤ค.¡กŒŒÒาÇวËห¹นŒŒÒา ·ทÒา§งtechnology
Present Choices, Future Possibilities
-¡กÒาÃรµตÑั´ดÊสÔิ¹นãใ¨จãใ¹นÇวÑั¹น¹นÕีé้ ÁมÕี¼ผÅลµต‹‹ÍอÍอ¹นÒา¤คµต
#Goods for present consumptionàconsumer goods
#Goods for future consumptionàcapital goods
-Futureville has higher economic growth rate
Pitfalls to Sound Economic
• Biases
• Loaded terminology
• Fallacy of composition
• Post hoc fallacy
• Correlation not causation
Reasoning
-·ทÄฤÉษ´ดÕีÁมÍอÕี ¤คµตÔิ
-·ท.ãใªชŒŒÈศÑั¾พ·ทàเ©ฉ¾พÒาÐะ àเÂยÍอÐะàเ¡กÔิ¹นäไ»ป
-·ท.ãใªชŒŒäไ´ดŒŒ¡กÑัºบ¡กÅลØุ‹‹ÁมÂย‹‹ÍอÂย ÍอÒา¨จãใªชŒŒäไÁม‹‹äไ´ดŒŒ¡กÑัºบ¡กÅลØุ‹‹ÁมãใËห­Þญ‹‹
-àเËหµตØุ¡กÒาÃร³ณ·ทÕีè่àเ¡กÔิ´ด¡ก‹‹Íอ¹น äไÁม‹‹ãใªช‹‹ÊสÒาàเËหµตØุàเÊสÁมÍอäไ»ป
-ÊสÑัÁม¾พÑั¹น¸ธ¡กÑั¹น äไÁม‹‹ãใªช‹‹ÊสÒาàเËหµตØุàเÊสÁมÍอäไ»ป
CH.3 Demand, Supply, and Market Equilibrium
Market
•
•
•
Interaction between
buyers =Demander à¼ผÙูŒŒ·ท∙Õีè่µตŒŒÍอ§ง¡กÒาÃร«ซ×ืé้ÍอÊสÔิ¹น¤คŒŒÒา and
sellers =Supplier à¼ผÙูŒŒ¢ขÒาÂย
Markets may be:
• Local
• National
• International
Price is discovered in the interactions of buyers and sellers
Demand ¤คÇวÒาÁมµตŒŒÍอ§ง¡กÒาÃร«ซ×ืé้Íอ
• A schedule or curves that shows the amounts of product that consumer are willing and able to purchase at a
given price (price level).
Law of Demand
• Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded
falls.
• Negative or inverse relationship b/w price and quantity of demanded.
• Demand curve is “downward sloping”
• Reasons :
a. Common sense (Price is an obstacle for buying)
b. Law of diminishing marginal utility
@Marginal Utility(MU) = extra utility (happiness, satisfaction) a consumer obtains from consumption of 1
addition unit of goods and service
c. Income effect and substitution effects
Income effect-Ex. low priceàpurchasing power of money income àbuyers purchase demand
Substitution effects—Ex. price of A switch to Bàdemand for B demand for A
Changes in Demand
#Change in ‘price’àchange in quantity d emand—lead to move from one point to another point on a fixed demand curve. #Change in ‘non price determinants’àchange in demanded –lead to shift of the dd curve either the right or left. ***Determinants of Demand
•
• Change in consumer tastes and preferences
-preferable change in tastes, demand dd curve will shift right
Determin an ts o f DD
1.Taste & Preference 2.No. of buyers 3.Income 4.Price of related goods 5.Consumer expectation •
•
•
•
-unfavorable change in tastes, demand dd curve will shift left
Change in number of buyers
-more buyers in the market for a good, demand dd curve will shift right
- fewer buyers in the market for a good, demand dd curve will shift left
Change in income
• Normal goods(Superior good) Normal goods are goods that we buy more of as our incomes increase
=ÂยÔิè่§งÃรÇวÂยÂยÔิè่§ง«ซ×ืé้Íอ [Income dd dd curve will shift right ]
• Inferior goods Inferior goods are goods we buy more of as our income decreases =ÂยÔิè่§ง¨จ¹นÂยÔิè่§ง«ซ×ืé้Íอ
[Income dd dd curve will shift right]
Change in prices of related goods
• Complements -If price of one complement , the demand for the other complement .
• Substitutes-If the price of one good , the demand for its substitute .
Change in consumers’ expectations
• Future prices If consumers expect the future price of a product to be higher, current demand for
the product.
• Future income If consumers expect the future income of a product to be higher, current demand
for the product.
Supply ¤คÇวÒาÁมµตŒŒÍอ§ง¡กÒาÃร¢ขÒาÂย
• A schedule or curve that shows amount of product that producers are willing and able to sell at a given price.
Law of Supply
• Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls.
• Positive or direct relationship b/w price and quantity supplied
• Supply curve is “upward sloping”
• Reason:
• Price acts as an incentive to producers
• At some point, costs will rise
Changes in Supply
#Change in ‘price’àchange in quantity supply—lead to move from one point to
another point on a fixed demand curve.
#Change in ‘non price determinants’àchange in supply –lead to shift of the dd
curve either the right or left.
***Determinants of supply
• A change in resource prices
* If resource prices (input prices) go up, supply decreases. If resource
prices (input prices) go down, supply increases
Determinants of Supply 1.
2.
3.
4.
5.
6.
resource prices
technology number of sellers taxes and subsidies
prices of other goods producer expectations
• A change in technology
* If technology increases, supply increases. If we adopt, or use, less efficient technology, supply decreases.
• A change in the number of sellers
* If the number of sellers increases, supply increases. If the number of sellers decreases, supply decreases.
• A change in taxes and subsidies
* If taxes are increased on a specific product, supply decreases. If taxes are decreased, or eliminated on a
specific product, supply increases. If subsidies are increased on a specific product, supply increases.
*If subsidies are decreased on a specific product, supply decreases.
• A change in prices of other goods
* If the price of another good that the producer could produce with the same resources falls, the supply
increases for the product the producers are currently producing.
• A change in producer expectations
* If producers expect that the price of the product they are producing will be higher in the future, they cut
back on current supply and supply will decrease. If producers expect the price of the product they are
producing will be lower in the future, they increase current supply to take advantage of the currently
higher price.
Market Equilibrium
• Equilibrium occurs where the demand curve and supply curve intersect.
• Surplus and shortage
• Rationing function of prices
=The ability of the competitive forces of
demand and supply to establish a price at
which selling and buying decisions are consistent.
• Efficient allocation
• Productive efficiency ¡กÒาÃร¼ผÅลÔิµต·ท∙Õีè่ÁมÕี»ปÃรÐะÊสÔิ·ท∙¸ธÔิÀภÒา¾พ
-Competitive market forces the producers to use the BEST technology and right mix of resources.
-Produce at maximum cost of production
• Allocative efficiency ¡กÒาÃร¨จÑั´ดÊสÃรÃร·ท∙ÃรÑั¾พÂยÒา¡กÃร ÍอÂย‹‹Òา§งÁมÕี»ปÃรÐะÊสÔิ·ท∙¸ธÔิÀภÒา¾พ
-The particular mix of goods and services most highly valued by society.
-Produce at Minimum cost of production
-Produce at Marginal benefit (MB) = Marginal Cost (MC)
-At equilibrium pointà Intersection of demand and supply
Changes in Demand and Equilibrium
Effects of Changes in Both Supply and Demand
Change in Supply
Change in Demand
Effect on Equilibrium Price
Effect on Equilibrium Quantity
1. Increase
Decrease
Decrease
Indeterminate
2. Decrease
Increase
Increase
Indeterminate
3. Increase
Increase
Indeterminate
Increase
4. Decrease
Decrease
Indeterminate
Decrease
Government Set Prices
• Price Ceilings
• Set below equilibrium price
• Rationing problem
• Black markets
• Price Floors
• Prices are set above the market price
• Chronic surpluses
CH.4 Elasticity
#Price Elasticity of Demand (Ed)
Measures buyers’ responsiveness to price changes.
Elastic àSensitive to price changes →Large change in quantity
InelasticàInsensitive to price changes →Small change in quantity
Price Elasticity of Demand Form ula
• Negative relationship b/w price and quantity demanded P↑ Qd ↓, P↓ Qd↑
Ed =
%∆!"#
%∆!"
• Use the midpoint formula
• Ensures consistent results
!!!!!
!!!!!
!
!!!!!
!
Ed = !!!!! ÷
1.Average formula 2.Always take the absolute value 3.Ignore (-­‐)minus sign 4.Ans always in% Meaning; If P ↑ 1% Qd ↓by......% If P ↓ 1% Qd ↑by......% Interpretation
• Ed > 1 demand is elastic
% Δqty dd > % ΔP
• Ed = 1 demand is unit elastic
% Δqty dd = % ΔP
• Ed < 1 demand is inelastic
% Δqty dd < % ΔP
• Extreme cases
• Perfectly inelastic
Ed=0
Q no response to price change
Vertical straight line dd curve
•
Perfectly elastic
Ed=∞
Q very response to price change
Horizontal straight line dd curve
Total Revenue Test
• TR= P x Q
• Inelastic demand (Ed<1)
• P and TR move in the same direction {P↑Q↓TR↑}
• Elastic demand (Ed >1)
• P and TR move in opposite directions {P↑Q↓TR↓}
• Unit elastic demand(Ed=1)
• P move and TR remain constant
{P↑,↓TR constant}
Determin an ts of Price Ed
1. Substitutability
• More substitutes, demand is more elastic
2. Proportion of Income
• Higher proportion of income, demand is more elastic
3. Luxuries vs. Necessities
• Luxury goods, demand is more elastic
4. Time
• More time available, demand is more elastic
#Price Elasticity of Supply (Es)
Measures sellers’ responsiveness to price changes
Elastic supply→ producers are responsive to price changes
Inelastic supply→ producers are not responsive to price changes
Price Elasticity of Supply Form ula
Es =
%ΔQsx
%ΔPx
• Es always positive and move in direct relationship/w price and quantity supplied
E s =0 Perfectly inelastic
E s =∞ Perfectly elastic
E s > 1 → elastic
P↑1% →Qs↑>1%
E s < 1 → inelastic
P↑1% →Qs↑<1%
E s = 1 → Unit Elasticity
P↑1% →Qs↑=1%
Determin an ts of Price Es
“Time” is primary determinant of elasticity of supply
• Time periods considered
• Market period= Perfectly inelastic supply
• Short Run =Supply is more elastic than in market period
-A period of time too short to change plant capacity.
-But long enough to use the fixed sized plant more or less intensive.
• Long Run= Supply is even more elastic than in the short run
-A time period long enough for firms to adjust their plant sixes an
-For new firms to enter (existing firms to leave) the industry
#Cross Elasticity of Demand (Exy)
Measures responsiveness of sales to change in the price of another good
Exy =
%ΔQdx
𝑸𝒙𝟐−𝑸𝒙𝟏
=
%ΔPy
(𝑸𝒙𝟐+𝑸𝒙𝟏)/𝟐
÷
𝑷𝒚𝟐!𝑷𝒚𝟏
(𝑷𝒚𝟐!𝑷𝒚𝟏)/𝟐
• Substitutes (Two goods that can used for the same purpose)
– positive sign
- Exy >0 àPy↑Qty for x↑
• Complements (two goods that can used together)
– negative sign
- Exy<0 àPy↑Qty for x↓
• Independent goods
- zero
- E xy =0
#Incom e Elasticity of Demand (E i )
Measures responsiveness of buyers to changes in income
%!!"#
Ei=
• Normal(Superior) goods
%!!
– positive sign
– E i >0
Inc.↓→Qty for x ↓
• Inferior goods
– negative sign
– E i <0
Inc.↓→Qty for x ↑
CH.9 Consumer Behavior
Law of Diminishing Marginal Utility
@Utility is the satisfaction one gets from consuming a good or service
• Not the same as usefulness
• Subjective
• Difficult to quantify
Util is one unit of satisfaction or pleasure
@Total utility is the total amount of satisfaction
@Marginal utility is the extra satisfaction from an additional unit of the good
!" (!"# )!!"(!"#)
MU =
=
Δ!
! (!"# )!!(!"#)
Δ!"
As consumption of a good or service (TU) increases, the
marginal utility obtained from each additional unit of the
good or service(MU) decreases. TU↑MU↓ Theory of Consumer Behavior Upward sloping MU=0à Maximum consumption MU=(-­‐)àMarginal disutility àTotal utility DECLINE Downward sloping Rational behavior – The consumer tries to use his or her money income to derive the greatest satisfaction from it.(¡กÒาÃร¡กÃรÐะ·ท∙íํÒา
·ท∙Øุ¡กÍอÂย‹‹Òา§ง ÁมÕีàเËหµตØุ¼ผÅลàเÊสÁมÍอ) Preferences – Each consumer has clear-cut preferences for certain goods and services available in the market.(ªชÑั´ดàเ¨จ¹นÇว‹‹Òา
ªชÍอºบ/äไÁม‹‹ªชÍอºบÍอÐะäไÃร)
Budget constraint – At any point in time the consumer has a limited, fixed amount of money to spend.
(ÁมÕีàเ§งÔิ¹น¨จíํÒา¡กÑั´ด)
Prices – Every good has a price and prices are unaffected by amounts purchased by the consumer. Goods and services have prices
and are scarce relative to the demand for them. (ÊสÔิ¹น¤คŒŒÒาÁมÕีÃรÒา¤คÒา ªชÑั´ดàเ¨จ¹น)
Utility Maximizing Rule
• Consumer allocates his or her income so that the last dollar spent on each product yields the
same amount of extra (marginal) utility
@ Consumer Equilibrium
-There is a balanced margin
-Consumer allocates his or her income so that the last dollar spend on product A equal to the last dollar spent
on product B
***
MU per dollar=
!"
!
Consumer Equilibrium→
!" 𝐴
=
! 𝐴
!" 𝐵
! 𝐵
Numerical Example
Decision-Making Process
Deriving the Demand Curve
Reasons: • Income effect -­‐The impact that a price change has on a consumer’s real income -­‐P orange↓MU per dollar↑à switch to buy more orange to restore con.equi. • Substitution effect -­‐The impact that a change in a product’s price has on it’s relative expensiveness -­‐P orange ↓freed up your incomeàyou can buy more on both goods ***DAIMOND -WATER PADOX
Why do some goods that are essential to life have low prices and goods that are not essential to life have high prices?
-The marginal utility of the last unit of water consumed is small because we consume a lot of water.
[low MU — high TU]
-The marginal utility of the last diamond is large because we consume few diamonds.
Prospect Theory
How people actually deal with life’s up and downs
-People judge good things and bad things relative to the status quo or the situations they are used to.
-People are loss adverse meaning we feel losses of some amount much more acutely than gains of the same amount.
ÁมÑั¹น¢ขÖึé้¹นÍอÂยÙู‹‹¡กÑัºบ ¤ค.¤คÔิ´ด/Êส¶ถÒา¹นÐะ ãใ¹น¢ข³ณÐะ¹นÑัé้¹น
•
Framing Effects and Advertising=
•
Anchoring and Credit Card Bills = ÊสÔิè่§ง·ทÕีè่äไÁม‹‹àเ¡กÕีè่ÂยÇว¢ขŒŒÍอ§งÁมÕี¼ผÅลµต‹‹Íอ¤คÇวÒาÁมÃรÙูŒŒÊสÖึ¡ก âโ´ดÂยäไÁม‹‹ÃรÙูŒŒµตÑัÇว
•
Mental Accounting and Warranties
•
The Endowment Effect =
= ÁมÍอ§งáแÂย¡ก äไÁม‹‹ÁมÍอ§งÃรÇวÁม
¢ขÍอ§ง·ทÕีè่àเÃรÒาÁมÕี ÁมÑั¡กÁมÕี¤ค‹‹Òา ÁมÒา¡ก¡กÇว‹‹Òา ¢ขÍอ§ง·ทÕีè่àเÃรÒาäไÁม‹‹ÁมÕี
CH.10 Business and the Costs of Production
Economic Costs
•
The payment that must be made to obtain and retain the services of a resource.
•
Firms pay “economic costs” to supplier
Payment for LAND
àRent
Payment for LABOR
àWage
Payment for CAPITAL
àInternet
Payment for ENTREPRENEURàProfit
•
Explicit Costs
•
•
Monetary payments (cash)
Implicit Costs
•
Value of next best use
•
Self-owned resources
•
Includes *normal profit
Accounting Profit and Normal Profit
•
Accounting profit
= Revenue – Explicit Costs
•
Economic profit
= Accounting Profit – Implicit Costs
=TR- Ex- Im
=TR- Economic cost
Short Run and Long Run
•
•
Short Run: Fixed plant
•
Some variable inputs
•
A period too brief to alter plant capacity but long enough to change degree of the plant current capacity used
Long Run: Fixed plant
•
All inputs are variable
•
Firms enter and exit
•
A period long enough to adjust the quantity of all resources
•
Total Product (TP) =Total quantity of goods produced
•
Marginal Product (MP) = Added products associated with adding a unit resource (labor)
𝑀𝑃 =
•
ΔTP
ΔL
Average Product (AP) =Output per unit
𝐴𝑃 =
!"
!
Law of Diminishing Returns
•
Resources are of equal quality
•
Technology fixed
•
Variable resources are added to fixed resources
•
At some point, marginal product will fall
•
Rationale
-------------------------------------------------------------
Short Run
MP>AP→AP↑ MP<AP→AP↓ MP=AP→MAX AP TP↑@increasing rate à MP↑à increasing marginal return TP↑@decreasing rateà MP↓àdiminishing marginal return TP @Maximum à MP=0 TP↓ à MP(-­‐)à Negative marginal return •
Fixed Costs (TFC)=Costs do not vary with output
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Variable Costs (TVC)=Costs vary with output
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Total Costs (TC) =Sum of TFC and TVC
TC = TFC + TVC
ATC=AFC+AVC = TC/Q
AFC=TFC/Q
AVC=TVC/Q
MC= ΔTC/ΔQ = ΔTVC/ΔQ
-B/w ATC and AVC is AFC
-All cost curve “U” shaped due to Diminishing
Except AFC which is downward sloping
-MC intersects AVC&ATC at MINIMUM point
Cost curve change 1)Resource price change ↑ AVC,ATC,MC ↑UPWARD 2)Technology price change↑ AVC,ATC,MC ↑DOWNWARD 3)Efficiency change Long-Run
Obtain by joining the minimum point of all the ATC curve.
Blue bumpy curve shows that lowest cost attainable for any output levels.
It’s called the firm’s planning curve
MES and Industry Structure
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Economies of scale (EOS)
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Labor specialization
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Managerial specialization
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Efficient capital
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Other factors
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Constant returns to scale (COS)
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Diseconomies of scale (DOS)
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Control and coordination problems
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Communication problems
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Worker Alienation
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Shirking
Vol. of output ↑ ATC↓ Long run ATC is downward Vol. of output ↑ ATC= Long run ATC is horizon Vol. of output ↑ ATC↑ Long run ATC is upward Minimum Efficient Scale (MES):
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Lowest level of output where long- run average costs are minimized
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Can determine the structure of the industry
#Constant returns to scale
Small and large-­‐scale producers will coexist and be equally successful. MES occurs at an output of q1. Firm can increase output until “q2”without increase in cost. #MES occur at HIGH level
Industries with economies of scale over a wide range of outputs will lead to a few large-­‐scale firms. The long-­‐run ATC curve is lowest only when there is a large output. #MES occur at LOW level
Economies of scale exist, are exhausted quickly, and turn back up substantially. Here minimum efficient scale occurs at a very low level of output. This results in a large number of small producers. **Shape of the long-run ATC is determined by Technology, Economic and diseconomies of scale.
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