KINH TẾ VI MÔ Chapter v quan nguyen

The Theories on Firm’s Behavior CONTENT *Theory on production - Production and Production function - Short run &Long run - Economies and diseconomies of scale *Theory on cost - Total, average and marginal cost - Economic, Accounting and Sunk cost *Theory on profit - Profit - Total, average and marginal revenue - Profit maximization and revenue maximization Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Some definitions -Production: is the process that transforms inputs into outputs, i.e goods and services, to satisfy human wants PRODUCTION INPUTS OUTPUTS K L Goods Services (Capital) (Labour) (Tangible) (Intangible) Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Some definitions - Inputs used to produce commodities to satisfy people’s needs, including: + Capital (K)  Capital: Physical capital (K) => Interests (i)  Land: Nature resources => Land tax (r) + Labor (L)  Labor: Human activity (L) => Wage (w)  Entrepreneurship: The capacity and willingness to develop, organize and manage a business venture => Profit (П) Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Some definitions Short run and long run + Short run: is a period of time in which the quantity of at least one input is fixed (fixed input) and the quantities of the other inputs can be varied (variable inputs) + Long run: is a period of time in which the quantity of all inputs can be varied * No specific time that can be marked on the calendar to separate the short run from the long run Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Production Decisions of a Firm - Production Technology + Firms can produce different amounts of outputs using different combinations of inputs - Cost Constraints + Firms must consider prices of labor, capital and other inputs + Firms want to minimize total production costs partly determined by input prices Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Production Decisions of a Firm - Input Choices   Given input prices and production technology, the firm must choose how much of each input to use in producing output Given prices of different inputs, the firm may choose different combinations of inputs to minimize costs  If labor is cheap, may choose to produce with more labor and less capital Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Production Decisions of a Firm - If a firm is a cost minimize, we can also study How total costs of production varies with output  How does the firm choose the quantity to maximize its profits - We can represent the firm’s production technology in form of a production function: The maximum quantity of outputs gained from certain quantity of inputs at current technology constraint in a certain time period Q = f (K, L)  Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Production Decisions of a Firm Cobb-Douglas production function Q = a Kα Lβ, where: Q = output L = labor input K = capital input α, β = labour and capital's share of output Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Short-run production Assumption: Labor is variable while capital is fixed  Firm can increase output only by using more labor  Two questions - How many products that one labor unit can contribute on average? - Should the firm hire another labor unit? If so, how many products this labor can contribute? Copyright © 2014 by Quan Hong NGUYEN I Theory on Production Short-run production  Average product of labour, or APL, is the ratio of total output to the numbers of labour unit used Q APL  L 10 Copyright © 2014 by Quan Hong NGUYEN II Production cost  Relationship between MC and MPL VC wL w w MC    Q Q (Q/L) MPL MPL first rises and then falls MC first declines and then goes up MC curve is U- shaped  II Production cost Relationship between MC and AVC MC > AVC : AVC  MC < AVC : AVC  MC = AVC : AVC  Relationship between MC and ATC MC > ATC : ATC  MC < ATC : ATC  MC = ATC : ATC => MC intersects AVC and ATC at their minimum points  II Production cost VC  VC' Q  VC AVC    Q  Q  MC  Q  AVC  Q MC  AVC   Q Q III.Profit maximization   Total revenue is the amount of money that a firm receive from the sale of its output Average revenue can be determined by dividing total revenue by total quantity TR AR  Q III Profit maximization  Marginal revenue is the change in total revenue resulting from the sale of an extra product TR MR  Q III Profit maximization    If the total revenue function is continuous, the we have MR = TR’(Q) Marginal revenue thus measures the slope of the total revenue curve TR max  MR = (E = -1) III Profit maximization P b P = aQ + b TR = PQ = aQ2 + bQ MR = 2aQ +b E = -1 D -b/2a MR -b/a Q III Profit maximization  Total revenue is the integral of marginal revenue Therefore the whole area below the marginal curve yields the value of total revenue Q0 Q0 0  MRdQ  TR  MR  TRQ0 III Profit maximization  Profit is the firm’s total revenue minus its total cost Profit = Total revenue - Total cost  Economic    profit versus accounting profit Economic profit is zero  the firm earns normal profit Economic profit is positive  abnormal profit Economic profit is negative  loss III Profit maximization Profit maximization Q* : π = TR – TC max  π’(Q) =  TR’ (Q) – TC’ (Q) =  MR – MC =  MR = MC     MR > MC : Increase output MR < MC : Decrease output MR = MC : optimal output level PRACTICE   a b c Demand is given by P = 55 - 2Q Cost function is TC = 100 - 5Q + Q2 What is the marginal revenue as a function of Q? If the firm wants to maximize profits, what price does it charge? How much profit and consumer surplus is generated at this price? If the firm wants to maximize total revenue, what price does it charge? Calculate quantity and profit Summary    The goal of firms is to maximize profit, which equals total revenue minus total cost When analyzing a firm’s behavior, it is important to include all the opportunity costs of production Some opportunity costs are explicit while other opportunity costs are implicit Summary    A firm’s costs reflect its production process A typical firm’s production function gets flatter as the quantity of input increases, displaying the property of diminishing marginal product A firm’s total costs are divided between fixed and variable costs Fixed costs not change when the firm alters the quantity of output produced; variable costs change as the firm alters quantity of output produced Summary     Average total cost is total cost divided by the quantity of output Marginal cost is the amount by which total cost would rise if output were increased by one unit The marginal cost always rises with the quantity of output Average cost first falls as output increases and then rises Summary The average-total-cost curve is U-shaped  The marginal-cost curve always crosses the average-total-cost curve at the minimum of ATC, the same with AVC  ... 2014 by Quan Hong NGUYEN II Production cost Cost in short-run 2.1 Fixed cost, variable cost, total cost - Variable cost (VC): the cost of a variable input, varies with the output level C VC 24... between AVC and APL AVC VC wL w w AVC    Q Q (Q/L) APL  As average product falls, average variable cost will rise substantially Q II Production cost Cost in short-run 2.2 Average cost - Average... receive from the sale of its output Average revenue can be determined by dividing total revenue by total quantity TR AR  Q III Profit maximization  Marginal revenue is the change in total revenue