KINH TẾ VI MÔ Chapter 5 for student BBA

CHAPTER THEORY 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 I Theory on production Some definitions - Production PRODUCTION INPUTS OUTPUTS 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 I Theory on production Production function - The maximum quantity of outputs gained from certain quantity of inputs at current technology constraint in a certain time period Q = f (Xi) I Theory on production Production function - Cobb-Douglas production function Q = ALαKβ, where: Q = output L = labour input K = capital input α and β = labour and capital's share of output I Theory on production Economies and diseconomies of scale *Increasing returns to scale (Economies of scale): 1% increase in inputs → more than 1% increase in outputs or f(hX) > hf(X) *Constant returns to scale: 1% increase in inputs → 1% increase in outputs or f(hX) = hf(X) *Decreasing returns to scale (Diseconomies of scale): 1% increase in inputs → less than 1% increase in outputs or f(hX) < hf(X) I Theory on production Economies and diseconomies of scale In term of Cobb-Douglas production function: α+β> 1: Increasing returns to scale α + β = 1: Constant returns to scale: α + β< 1: Decreasing returns to scale I Theory on production Economies and diseconomies of scale According to Cobb& Douglas: US economy’s production function from 1899 - 1912: Q = L0.25K0.75 ⇒ conclusion: + + I Theory on production Production in short-run - Average Product (AP) of an input: equals to total product divided by the quantity of the input employed - Average Product of labour (APL) - Average Product of capital (APK) I Theory on production Production in short-run - Marginal Product (MP) of a input is the increase in total product divided by the increase in the quantity of the input employed, holding the quantity of all other inputs constant - Marginal Product of labour (MPL) - Marginal Product of capital (MPK) I Theory on production Production in short-run - The law of diminishing marginal returns: occurs when the marginal product of an additional input (e.g worker) is less than the marginal product of previous input (i.e previous worker) * What is the relationship between MP and AP? Capital (K) Labour (L) Output (Q) 70 150 4 4 APL MPL 75 288 } 52 52 } 10 I Theory on production Production in long-run Capital Iso-quantity curve: (K) shows the various combinations of input quantities that lead to the same level of output More quantity A C B Q2 Q1 Labour (L) I Theory on production Production in long-run Iso-quantity curve’s characteristics - − - Downward sloping, the closer to the right hand-side, the more quantity produced Never intersect ∆K.MPPK - ∆L MPPL = → MPPL / MPPK = ∆K / ∆L → MPPL / MPPK : the slope of Iso-quantity curve = The marginal rate of technical substitution (MRTS) I Theory on production Production in long-run MRTS: reduce gradually as the quantity of input (L) increase K A B C D L I Theory on production Production in long-run *Special iso-quantity curve K Perfect substitute inputs MRTS = const vs L I Theory on production Production in long-run *Special iso-quantity curve K Perfect Complement inputs L I Theory on production Production in long-run - Iso-cost: shows the various combinations of inputs that producer can get from the available cost (i.e amount of money) TC= r.K + w.L K → K= TC/r – (w/r).L → w/r : the slope of total cost C Area C: can not afford A Area D: Inefficient B D L 10 I Theory on production Production in long-run - Iso-cost: K TC, w= const, r changes r decreases: IC1 → IC2 IC1 r increases: IC1 → IC3 L I Theory on production Production in long-run - Iso-cost - I, r = const, w changes K W decreases: IC1 → IC2 W increases: IC1 → IC3 IC1 L 11 I Theory on production Production in long-run - Iso-cost - w,r = const, TC changes K TC increases: IC1 → IC2 TC decreases: IC1 → IC3 IC1 L I Theory on production Production optimzation K A C D Q3 B Q2 Q1 L 12 I Theory on production Production optimization At point C, the iso-quantity curve’ slope is equal to the iso-cost’s slope Exercise Firm A has production funtion: Q=100KL, w=30$, r=120$ a To produce Q=10.000 units, what is minimum cost? b With available cost TC = 72.000$, what is maximum quantity that can be produced? 13 II Theory on cost Cost in short-run 1.1 Fixed cost, variable cost, total cost - - Fixed cost (FC): the cost of a fixed input, independent with C the output level Examples: Q II Theory on cost Cost in short-run 1.1 Fixed cost, variable cost, total cost - - Variable cost (VC): the cost of a variable input, varies with the output level C Examples: Q 14 II Theory on cost Cost in short-run C 1.1 Fixed cost, variable cost, total cost - Total cost (TC):is the sum of total fixed cost and total variable cost TC = VC + FC Q II Theory on cost Cost in short-run C 1.2 Average cost - Avarage fixed cost (AFC): is total fixed cost per unit of output AFC = FC Q Q 15 II Theory on cost Cost in short-run 1.2 Average cost - Avarage variable cost (AVC): is total variable cost per unit of output AVC = - C VC Q Note: Average curves (except AFC) is are Ushaped Q II Theory on cost Cost in short-run 1.2 Average cost - Total average cost (ATC): is C total cost per unit of output ATC = TC = AFC + AVC Q Q 16 II Theory on cost Cost in short-run 1.3 Marginal cost (MC): is the change in total cost results from a unit increase in output MC = C ∆ TC = TC ' ( Q ) ∆Q MC intersects AVC and ATC at their minimum points Q II Theory on cost Cost in long-run - Long-run total cost (LTC): C is the total cost for production when both capital and labour can be varied Q 17 II Theory on cost Cost in long-run - Long-run average total cost (LATC): is long-run total cost per unit of output LATC = LTC Q II Theory on cost Cost in long-run Increasing returns to scale Constant returns to scale Decreasing returns to scale General 18 II Theory on cost Cost in long-run C Q II Theory on cost Cost in long-run - Long-run marginal cost (LMC): is the change in long-run total cost results from a unit increase in output LMC = ∆LTC = LTC '(Q ) ∆Q - LMC intersect LTC at its minimum points 19 II Theory on cost Cost in long-run Increasing returns to scale Constant returns to scale Decreasing returns to scale General II Theory on cost Economic cost, Accounting cost and Sunk cost - Economic cost: Total amount paid for inputs used in production, includes: - Explicit cost: Amount paid for inputs that not belong to the firm’s owner - Implicit cost: Amount paid for inputs that belong to the firm’s owner Economic Cost = Explicit Cost + Implicit cost 20 II Theory on cost Economic cost, Accounting cost and Sunk cost - Accounting cost: Amount paid for inputs used in production and reported in accounting notes Economic Cost - = Accounting Cost + Opportunity cost Sunk cost: Amount paid for inputs used in production which neither be refundable nor changeable by future decisions/ actions II Theory on profit Definition Profit (Π Π): is the difference between total revenue and total cost Π = TR − TC Π = Q.P − Q ATC = Q( P − ATC ) Factos affect on profit: - + P, Q, ATC + 21 II Theory on profit Definition Average revenue: is total revenue per unit of output AR = - TR Q Marginal revenue: is the change in total revenue results from a unit increase in output MR = ∆ TR = TR '( Q ) ∆Q II Theory on profit Profit maximization ΠMAX ⇔ Π'(Q) = ⇔ (TR − TC )'( Q ) = ⇔TR'(Q) −TC'(Q) = ΠMAX ⇔MR−MC= ΠMAX ⇔ MR= MC 22 II Theory on profit Revenue maximization TRMAX ⇔TR'(Q) = ⇔MR= TRMAX ⇔MR= Exercise Firm A’s demand and total cost functions are as follows: P = 12 − 4Q TC = Q + Q + a b State out optimal Q,P, Π and TR to prove that profit maximization and revenue maximization are quite different Firm A’s strategy is to earn as much revenue as possible provided that profit always equal to 10$ State out optimal Q,P and TR 23 ... What is the relationship between MP and AP? Capital (K) Labour (L) Output (Q) 70 150 4 4 APL MPL 75 288 } 52 52 } 10 I Theory on production Production in long-run Capital Iso-quantity curve:... cost: Total amount paid for inputs used in production, includes: - Explicit cost: Amount paid for inputs that not belong to the firm’s owner - Implicit cost: Amount paid for inputs that belong... scale According to Cobb& Douglas: US economy’s production function from 1899 - 1912: Q = L0.25K0. 75 ⇒ conclusion: + + I Theory on production Production in short-run - Average Product (AP) of