4. Fixed factors and variable factors
• Variable factors are the inputs
a manager can adjust to alter
production in the short run,
E.g, labour and materials
• Fixed factors are the inputs
that a manager cannot adjust
to alter production in the
short run. e.g., capital or land.
14. Short run and long run
The short run is • The long run is
defined as that time that period of
period where at time when all
least one factor of inputs can be
production is fixed. changed.
15. The Law of Diminishing Returns
• The law of diminishing
returns states that in
all productive
processes, adding more
of one factor of
production,(variable
factor) while holding all
others constant will at
some point yield lower
per-unit returns.
16. Theory explained
• Consider a factory that employs laborers to produce its
product. If all other factors of production remain
constant, at some point each additional laborer will
provide less output than the previous laborer. At this
point, each additional employee provides less and less
return. If new employees are constantly added, the
plant will eventually become so crowded that
additional workers actually decrease the efficiency of
the other workers, decreasing the production of the
factory.
Read more: http://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp#ixzz292UDwHY4
17. Explicit Cost Implicit cost
• The costs that have a • The cost of using the firm’s
money value like raw own resources. This is the
materials, energy, rent, earnings that a firm could
interest and wages and have had if it had employed
have to be purchased from its factors in another
outside the use/hired/sold out.(Normal
firm.(Accounting costs) profit)
• (Accountant’s view) • (Economist’s view)
19. • TFC is the total costs of the fixed assets.
TFC • It is a constant amount.
• TVC is the total costs of the variable assets.
TVC • TVC increases as more variable factors are used.
• Total costs of all fixed and variable factors.
TC • TC=TFC+TVC
24. • AFC is the fixed cost per unit of output.
AFC • AFC=TFC divided by output
• AVC is the variable cost per unit of output.
AVC • AVC=TVC divided buy output.
• ATC is the total cost per unit of output.
ATC • ATC= TC divided by output.
25. Marginal Cost is the increase in the
total cost of producing an extra unit of
output. MC= TC divided by output
28. The long run
• Definition:
• The long run is the planning
stage.
• Free to change all the factors of
production.
• But constrained by the current
level of technology.
30. Increasing, Constant and Decreasing
Returns
• When long-run costs are
falling, as output increases
Increasing Returns.
• When long-run costs are
constant, as output increases
Constant Returns.
• When long-run costs are
decreasing, as output
increases
Decreasing Returns.
31.
32. • Economies of Scale:
• The increase in efficiency of
production as the number of
goods being produced
increases.
• Diseconomies of Scale:
• Rather than experiencing
continued decreasing costs
per increase in output, firms
see an increase in marginal
cost when output is increased.
33. 1. Specialisation:
• As firms grows, they specialise in individual
areas of expertise, production, finance,
marketing….
34. ECONOMIES OF SCALE
• 2. Division of labour:
• As production increase, firms break-up the
production process, and use division of labour
and reduce the unit costs.
35. ECONOMIES OF SCALE
• 3. Bulk buying:
• Negotiate discounts with suppliers and reduce
the unit costs.
36. ECONOMIES OF SCALE
• 4. Financial economies:
• Banks charge lower interest rate to larger
firms because they are less risky and less likely
to fail to repay.
37. ECONOMIES OF SCALE
• 5. Transport economies:
• Delivery cost is less. Can have own transport
fleet.
38. ECONOMIES OF SCALE
• 6. Large machines:
• Big producer can own big machines and save
the money spent on hiring machines oft and
on.
39. ECONOMIES OF SCALE
• 7. Promotional economies:
• Advertising, sales promotion, personal selling,
publicity…everything is possible for a big firm.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51. • TR when price does not
change.(Horizontal demand
curve)
• The firm does not have to
lower the price to sell more
output.
• If PED=perfectly elastic,
then
• P=AR=MR=D
• TR curve is upward sloping.
52. • TR when price change as output
increase.(downward sloping demand curve)
• Firm has to lower price to sell more.
• PED falls as output increases.
53. • TR rises at first but will eventually
falls as output increases.
When PED is elastic, to increase
revenue, lower the price.
When PED is inelastic, to increase
revenue, raise the price.
When PED is unity, to increase
revenue, leave the price
unchanged.
54. • Generally,
• Profit =TR-TC.
• But for an economist,
• Profit= TR-Economic Cost(Explicit + Implicit
Cost)
55.
56. TR and TC
Firm A Firm B Firm C
Total Revenue 200 000 200 000 200 000
TFC 40 000 40 000 40 000
TVC 80 000 100 000 120 000
Implicit Cost 60 000 60 000 60 000
Total Cost 180 000 200 000 220 000
Firm A: TR>TC Abnormal Profit
Firm B: TR=TC Normal Profit
Firm C: TR<TC Loss
57. Whether to produce or not?
Firm A Firm B Firm C
TR 80 000 120 000 150 000
TFC(including opp.cost) 100 000 100 000 100 000
TVC 100 000 120 000 140 000
TC 200 000 220 000 240 000
Loss 120 000 100 000 90 000
Firm A: Loss = FC+20 000 VC
Firm B: Loss = FC
Firm C: Loss = <FC
58.
59. • At price P, firm is
able to cover
variable cost in the
short run.
• Shut down price is
P1 =ATC
P.
• P=AVC P=AVC
• Below this price,
firm will shut down
in the short-run.
