# 代写 MUF0061 Microeconomics

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• 代写MUF0061 MicroeconomicsMUF0061 Microeconomics
Study Area 4
Firms, production & costs
Week 7 & 8, 2-2016

Key questions

1.What is the driving force for business firms?
2.How do we measure a firm’s profit?
3.What is the difference between explicit costs and implicit costs?
4.Why is it important to distinguish between the short-run and the long-run?
5.What is the difference between fixed and variable inputs?
6.What is the production function?
7.What is the relationship between short-run costs and output?
8.What is the law of diminishing returns?
9.What is the difference between fixed and variable costs; average and marginal costs?
10.What is the difference between average and marginal product?
11.How are cost curves derived?
12.What are economies of scale?

What is the driving force for business firms?

In Economics, we assume the main goal of firms is to maximize their PROFIT.

Firms sometimes have other goals such as:
§Protecting the environment
§Providing an essential service
§Providing jobs for people

The production function

The production function deals with the maximum output that can be produced with a minimum about of input.
How do we measure a firm’s profit?

A simple example:
A firm produces and sells 1000 cakes.
The ingredients needed for each cake (flour, eggs) cost \$10.
It takes one person 1/2 hour to make each cake. Wage per hour is \$20.
The hire of the kitchen is \$100 per day, and during that day 50 cakes can be made.
Cake costs= \$10 for ingredients + \$10 for labour + \$2 for the hire of the kitchen = \$22.
If a firm sells 250 cakes a week, at selling price of \$40, its
Profit is:
Total Revenue   \$10,000
Minus Total Costs      \$5,500
Equals Profit    \$4,500

Accounting profit

ACCOUNTING PROFIT = Total Revenue – Explicit costs
Accountants only consider the actual costs (explicit costs) of running a business e.g. wages, rent.

Cake example:
Total revenue   \$10,000
minus explicit costs      \$5,500
Equals Accounting Profit:      \$4,500

Economic profit
ECONOMIC PROFIT = Total Revenue – Explicit costs – Implicit costs
Economists also consider opportunity costs of running a business i.e. the company resources (money, labour, kitchen) that could have been used to produce something else.
Implicit cost (opportunity cost) can include:
§Wages earned somewhere else
§Interest earned on money in the bank – instead of investing in the business
E.g. For a business in one year, it cost \$60,000 to maintain production, but earned \$100,000 in revenue. The accounting profit would be \$40,000 (\$100,000 in revenue - \$60,000 in explicit costs). However, if the firm could have made \$50,000 by renting its land and capital, its economic profit would be a loss of \$10,000 (\$100,000 in revenue - \$60,000 in explicit costs - \$50,000 in opportunity costs).

Source: Boundless. “Difference Between Economic and Accounting Profit.” Boundless Economics. Boundless, 08 Aug. 2016. Retrieved 24 Aug. 2016 from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/production-9/economic-profit-65/difference-between-economic-and-accounting-profit-245-12343/

MCQ 2-2015
Implicit costs are:
a.payments of non-owners of the firm for the use of their resources.
b.opportunity costs that are paid from part of the business to another.
c.opportunity costs of using the resources owned by the firm.
d.costs incurred by outsiders that are passed on to the firm to be paid in a future calendar year.

Normal profit
Total revenue = explicit costs + implicit costs

Normal profit is the minimum profit (break-even) to keep a firm in operation.

Normal profit is when the accounting profit is just enough to ensure that all resources used by the firm earn their opportunity cost  (normal profit).

In the example above, normal profit required is \$525,000 (explicit costs) and  \$105,00 (implicit costs) – a total of \$630,000.
The business needs to earn this amount to breakeven and cover costs.
Activity 1.1 Walter’s race horses
Activity 1.1 Walter’s race horses
Why is it important to distinguish between the short-run and the long-run?

What is the difference between fixed and variable inputs?

Activity
Exam Question 1-2016
From the following costs, the best example of a fixed cost is:

a.The wages of the firm’s workers
b.The electricity used in the production process
c.The rent paid for the office space used by the firm
d.The price of a firm’s product
Measuring the production function in the short term
Three measures of production and productivity:
1.Total product (output/quantity of labour)
2.Average product
3.Marginal product (observing the result of adding an additional unit – the result initially shows improved productivity but later diminishing returns occur)
Total product
Total product (TP) is the total quantity of output produced by a firm.

Activity – Buzzy Beer’s Production

Average product
Average product (AP) is the total quantity of output per unit of variable input or labour. This tells us how much output each unit of labour (each worker) produces on average.

AP =   Total output
Units of variable input e.g. labour
Marginal product
Marginal product (MP) is in the short run, the extra or additional output resulting from one additional unit of the variable input, i.e. labour.
MP tells us how much output increases as for example, labour (the variable input) increases by one worker.
MP =        Δ in total output
Δ in variable input (e.g. labour)
1.Calculate the change in the total product. For example, assume that adding two additional worker increases production by 25 units. Thus, the total change in the product is 25 units.
2.Calculate the change in variable input. Continuing with the same example, we added two works, so the change in variable input is 2.
3.Divide the change in total product by the change in the variable product. Continuing with the same example, 25 /2 = 12.5. This figure represents the marginal product.

Marginal product curve
Note: Marginal product is plotted at the midpoints because the change in total output occurs between each additional unit of labour used.

Marginal product and the law of diminishing returns
As more and more units of variable inputs  (e.g. labour) are added to one or more fixed inputs (e.g. land or machine), the marginal product at first increases, but there comes a point when it begins to decrease – this is known as the law of diminishing returns.
Explanation:
Even though there are more workers, they now need to share the machines.  Eventually workers become inefficient as they have  to wait to use a machine to do their work.

MCQ 2-2015
The law of diminishing returns states that beyond some level of production:
a.the marginal product decreases per unit of output.
b.the opportunity cost of producing decreases as resources become more scarce.
c.the level of implicit costs exceed explicit costs.
d.total fixed costs decrease as total variable costs increase.

Costs and cost curves
When firms use resources to produce, they incur costs of production which include purchases of resources, e.g. land, labour and capital.

To examine production costs, economists study the following short run cost curves:
1.Total cost, total variable and fixed costs
2.Average costs (ATC, AVC, AFC) and marginal costs

EXAMPLE: This table shows the costs involved in baking cakes, where fixed cost is the hire of kitchen, and variable costs are wages (\$20 per hour) and ingredients (\$8 per cake):

Baking cakes – total costs
Past exam question 2-2015
The shape of the total fixed cost curve is:
a.initially upward than downward sloping.
b.initially downward then upward sloping.
c.horizontal.
d.vertical.

Baking cakes average costs
Baking cakes – average cost curves

Exam Question 1-2016
Eggspress Omelettes is a fast food restaurant who produces omelettes.
Using the data provided calculate:
i.Total fixed costs
ii.The average cost of producing 3 omelettes
iii.The marginal cost of producing the 6th omelette
iv.The price per omelette
v.The profit maximising level of output per hour

Marginal average rule
The Marginal Cost (MC) curve intersects/cuts the Average Cost curves (ATC and AVC) at the minimum point.

MC first falls as output expands, reaches a minimum and then rises.
When MC < AC, AC falls.
When MC > AC, AC rises.
When MC = AC, AC is at its minimum point.

MC curve

Initially the MC curve is downward sloping but later is upward sloping.

§MC curve is derived from marginal product.
§As the marginal product of the variable inputs (e.g. the workers) increases, the marginal costs will decrease (less wages will need to be paid per unit of output if workers are more productive).
§Similarly, as marginal product starts to decline, the marginal costs start to rise, as more wages will need to be paid per unit of output when the workers are less productive.

MC & AC rules
§There is a direct relationship between Marginal Cost and Average Cost.

§When marginal cost is below or less than average cost it pulls average cost down.
§
§When marginal cost is higher than average cost it pulls average cost up.

v

Average and Marginal Cost Curves
The relationship between MP & MC
Summary – TC & MC Cost Curves

Short run versus long run
Long-run production costs
Long-run average cost curve
§The graph shows three short run cost curves for a small, medium and large size factory.
§It also shows the long run curve where the company adjusts the size of its factory to the quantity of production.
Different scales of production
The long-run average cost curve is U-shaped. This reflects returns to scale:
§Economies of scale (LRAC falls as output rises)
§Constant returns to scale (LRAC stays the same as output rises)
§Diseconomies of scale (LRAC rises as output rises).
Economies of scale
A situation in which the LRAC declines as the firm increases output.

Examples of sources of economies of scale:
§Bulk buying – larger firms can secure better discounts from materials suppliers
§Financial economies –larger firms are less risky borrowers – they can generally borrow money at a cheaper interest rate.
§More efficient use of capital equipment through better technology – only larger firms can afford to use the most innovative technology

Constant returns to scale
A situation in which the long-run average cost curve does not change as the firm increases output.

Diseconomies of scale
As a firm expands, diseconomies of scale, eventually occur, long-run average cost increase as output expands.
Sources of diseconomies of scale:
§Bureaucracy - additional layers of management are needed to monitor production.
§Barriers to communication - The more levels of management in an organization, the more difficult it is for top management to communicate with those that perform most of the production tasks.
§Management difficulties (e.g. lack of coordination)
§

Exam Question 1-2016
Refer to the graph below and answer the question that follows:  The range at which diseconomies of scale occur is:
a.Levels of output between points A and B
b.Levels of output greater than at point C
c.Levels of output less than at point A
d.Not shown

Formulas
Revenue = price x quantity
Profit = Revenue – Costs
Total Cost = TFC + TVC
Average Total Costs = (TFC + TVC) / Q
Average Fixed cost  (AFC) = TFC / Q
Average Variable cost (AVC)= TVC / Q
Marginal Cost = ∆ total cost / ∆ total output

Short Run Cost Data
§Average variable cost, AVC, equals variable cost divided by output è AVC = VC / q
§Average total cost, ATC = TC / q
§Both average variable cost and average total cost first decline as output expands, then increase
Exam Question 1-2016

Using the data provided in Table 1, above, calculate the profit maximising level of output per hour for the firm. (1 mark)
Imagine the Australian government initiates a nation-wide advertising campaign promoting the health benefits of eating eggs, the main ingredient in an omelette.
On Figure 3, illustrate the likely effects on the market price and quantity of eggs.

Explain how the price mechanism operates to allocate resources, using this scenario and market as an example. (1 + 3 = 4 marks)

Past Examination Questions
Exam question 1-2015
代写MUF0061 Microeconomics