Presentation is loading. Please wait.

Presentation is loading. Please wait.

Microeconomics Unit 2 Production, cost, profit and perfect competition.

Similar presentations


Presentation on theme: "Microeconomics Unit 2 Production, cost, profit and perfect competition."— Presentation transcript:

1 Microeconomics Unit 2 Production, cost, profit and perfect competition

2 Topic 1: PRODUCTION Marginal Product (MP)- the additional output generated by additional inputs (workers). = change in total product Total Product (TP)- total output or quantity produced Average Product (AP)- the output per unit of input Average Product = Total Product # of workers 2

3 calculate MP and AP # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP)

4 # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) calculate MP and AP 4

5 # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) calculate MP and AP 5

6 Stages of Production Increasing returns: workers produce more additional products Happens because of SPECIALIZATION

7 Stages of Production Diminishing returns: workers produce less ADDITIONAL products Happens because more workers are using the same fixed resources (not enough fixed resources to go around)

8 Diminishing Marginal Returns Too many cooks in the kitchen!

9 Stages of Production Negative returns: workers produce less total product Happens because workers get in each others way

10 # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) Identify the three stages of returns 10

11 Graphing Production 11

12 Stage I: increasing marginal returns Total Product Quantity of Labor Marginal and Average Product Quantity of Labor Total Product Due to Specialization Average Product 12 Marginal Product

13 Stage II: decreasing marginal returns Due to more workers using same fixed resources Total Product Quantity of Labor Marginal and Average Product Quantity of Labor Total Product Average Product 13 Marginal Product

14 Total Product Quantity of Labor Marginal and Average Product Quantity of Labor Total Product Stage III: Negative Marginal Returns Marginal Product Average Product 14

15 Topic 2: short run costs vs. long run costs

16 Short Run: fixed plant Time period in which some resources remain fixed; it is too brief for a firm to change its plant capacity

17 Long Run: Variable plant Time frame in which all resources can be varied; period of time is long enough to change plant size

18 Topic 3: Short Run Costs of Production

19 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost Average total cost

20 Complete MP in chart in notes

21 workers TP Marginal product Increasing and decreasing returns????

22 EXPLICIT VS. IMPLICIT COSTS Explicit costs = out of pocket expenses Accountants only look at this Implicit costs = opportunity costs (foregone wages, depreciation ect) Economists consider explicit AND implicit!

23 Overall costs: What is the overall cost of producing?? Must look at TOTALS Fixed Costs: (FC) Costs that DON’T change Variable Costs: (VC) Costs that DO change Total Costs: FC + VC

24 workers TP Marginal product Fixed cost

25 workers TP Marginal product Fixed cost What happens to FC as more products are produced???

26 workers TP Marginal product Fixed cost Variable cost Total cost What happens to VC as more products are produced?

27 workers TP Marginal product Fixed cost Variable cost Total cost What happens to TC as more products are produced???

28 Total Costs Cost Graphs

29 1. Fixed cost will always be the same 2. VC will always slope up 3. Total cost will always slope up * TC always > VC *Distance between TC and VC = FC

30 Marginal Cost: Additional costs of making ONE more product. 30

31 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost What happens to MC as more products are produced???

32 How much does each product cost to make? Use AVERAGES Average Fixed Cost (AFC): fixed cost PER PRODUCT AFC = FC/TP

33 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost

34 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost What happens to AFC as more products are produced???

35 Average Variable cost (AVC): variable cost PER PRODUCT AVC = VC/TP

36 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost

37 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost What happens to AVC as more products are produced???

38 Average total cost (ATC): TOTAL cost PER PRODUCT ATC = TC/TP or ACT = AFC + AVC

39 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost Average total cost

40 workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost Average total cost What happen to ATC as more products are produced???

41 Average costs graph

42 AFC will always get smaller as more products are produced Why??? Fixed cost are spread out among more products AVC and ATC – always U shaped due to increasing and then diminishing returns Distance between ATC and AVC gets smaller as more products are produced

43 Marginal cost with Average costs ***

44 MC intersects ATC at min. point Gap between ATC and AVC gets smaller as Q increases

45 Quantity Costs (dollars) TC VC What is the FC? At 9 units what is the: VC TC AVC ATC AFC

46 Quantity Costs (dollars) AVC ATC Practice reading MC 46 At an output of 11, what is the : AVCMCAFC ATC TC VC

47 Practice reading At output Q, what area represents: TC VC FC CDQ0 BEQ0 AFQ0 or CDEB 47

48 Costs (dollars) Average product and marginal product Quantity of labor Quantity of output MP AP MC ATC When the marginal cost is below the average, it pulls the average down. When the marginal cost is above the average, it pulls the average up. Relationship between ATC and MC Example: The average income in the room is $50,000. An additional (marginal) person enters the room: Bill Gates. If the marginal is greater than the average it pulls it up. The MC curve intersects the ATC curve at its lowest point. 48

49 Things to remember about drawing cost curves: 1. Draw MC first (looks like a check mark) 2. Draw ATC – start at point above MC 3. Draw AVC – start at point above MC but below ATC 4. MC curve always intersects ATC and AVC at their minimum points 5. Distance between ATC and AVC gets smaller as output (quantity) increases 6.ATC and AVC are U shaped (due to increasing and then decreasing marginal returns)

50 TOPIC 4: Long run costs of production Long run costs reflect changes in plant size

51 In the long run all resources are variable. Plant capacity/size can change. Definition and Purpose of the Long Run Why is this important? The Long-Run is used for planning. Firms use to identify which plant size results in the lowest per unit cost. 3 things can happen in the long run 1. Economies of scale 2. Constant returns to scale 3. Diseconomies of scale 51

52 Long Run AVERAGE Total Cost 52 Quantity Cars Costs ATC 1 MC , ,000 1,000,0000 $9,900,000 $50,000 $6,000 $3,000

53 Long Run AVERAGE Total Cost 53 Quantity Cars Costs ATC 1 MC 1 MC , ,000 1,000,0000 $9,900,000 ATC 2 Company builds new plant ATC goes down due to mass production $50,000 $6,000 $3,000

54 Long Run AVERAGE Total Cost 54 Quantity Cars Costs ATC 1 MC 1 ATC 2 MC 2 ATC 3 MC , ,000 1,000,0000 $9,900,000 $50,000 $6,000 $3,000 Company builds new plant ATC goes down due to mass production

55 Long Run AVERAGE Total Cost 55 Quantity Cars Costs ATC 1 MC 1 ATC 2 MC 2 ATC 3 MC , ,000 1,000,0000 $9,900,000 $50,000 $6,000 $3,000 MC 4 ATC 4 Company builds more plants, ATC stays the same

56 Long Run AVERAGE Total Cost 56 Quantity Cars Costs ATC 1 MC 1 ATC 2 MC 2 ATC 3 MC 3 MC , ,000 1,000,0000 $9,900,000 MC 4 ATC 5 $6,000 $3,000 ATC 4 Company builds more plants and ATC begins to increase $50,000

57 Long Run AVERAGE Total Cost 57 Quantity Cars Costs ATC 1 MC 1 ATC 2 MC 2 ATC 3 MC 3 MC , ,000 1,000,0000 $9,900,000 MC 4 ATC 5 $6,000 $3,000 ATC 4 $50,000

58 Long Run AVERAGE Total Cost 58 Quantity Cars Costs ATC 1 MC 1 ATC 2 MC 2 ATC 3 MC 3 MC , ,000 1,000,0000 $9,900,000 MC 4 ATC 5 $6,000 $3,000 ATC 4 Where is the Long Run Average Cost Curve? $50,000

59 The LRATC curve connects the lowest points on all of the SRATC curve (envelope)

60 Economies of Scale- LRATC curve is decreasing Happens due to mass production techniques

61 Constant Returns to Scale- The ATC to produce is staying the same LRATC is flat

62 Diseconomies of Scale- LRATC is increasing Caused by a firm becoming too big “for own good”

63 LRATC Simplified 63 Quantity Costs Long Run Average Cost Curve Economies of Scale Constant Returns to Scale Diseconomies of Scale The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES. Firm should select the size of firm that has lowest SRATC

64 Topic 5: Revenue Total Revenue = amount of $ a firm takes in from selling a product TR = P X Q

65 Marginal revenue The increase in revenue that results from selling ONE more unit

66 Topic 6: PROFIT Profit = financial gain TOTAL REVENUE – TOTAL COST TR>TC = PROFIT TR

67 Calculate profit Total productTotal costTotal revenueProfit , ,300

68 Calculate profit Total productTotal costTotal revenueProfit , ,300400

69 2 ways to improve profit 1. Increase revenue 2. decrease costs

70 Making a profit activity

71 Review: What is Revenue????

72 What are the different types of costs??? FIXED and VARIABLE cost EXPLICIT cost and an IMPLICIT cost

73 Profit Video clip Costs??? Revenue??? Profit??? PROFIT = total revenue – total cost

74 Marshmallow Towers Objective: Your goal in this activity is the same goal of every business, to make PROFIT. Your assignment is to earn the most profit as you make a tower made only of toothpicks and mini- marshmallows. You will have 15 minutes

75 What does it cost to build the tower???

76 Fixed Costs rent $500 property tax $150 Insurance $100 opportunity cost$ $ 50 Total Fixed Cost = $ 800

77 Variable cost – will depend upon the # of marshmallows and toothpicks you use $50.00 each$ each

78 How much will we earn for building our tower??? Revenue will be based on the HEIGHT and STRENGTH of your tower

79 HEIGHT Inches 1-4 = $1,000 in inch Every inch over 4 = $2,000 each inch

80 Strength Can stand alone for at least 10 seconds = $2,000 Can hold a sheet of paper on top for at least 10 seconds = $2,000

81 Record Sheet You will record all costs on your record sheet You may purchase as many toothpicks and marshmallows as you wish RECORD THE NUMBER EACH TIME YOU PURCHASE! Marshmallows toothpicks ______ ________ _______________ Total # marshmallows ___ Total # toothpicks ______

82 Before tower is judged Marshmallows Toothpicks ______ ________ _______________ Total # marshmallows __ Total # toothpicks ____ X $50 = ______ X $100 = ______ Total Variable cost = ________

83 Stop Watch: 15:00

84 Discuss these questions as a group – answer on your record sheet 1.We could have improved our profit by….. 1.How did your group try to minimize your costs? 2.How did your group try to maximize your revenue? 1.Why is it important to consider both cost and revenue when making business decisions?

85 Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly TOPIC 7: MARKET STRUCTURES Imperfect Competition 85 Most competition least competition

86 Perfect Competition Number of firms: Many (thousands) of small firms Choice for Consumers: many Type of Good: identical products; perfect substitutes to each another Market Entry: very easy, no barriers to entry Amount of competition: Great deal; more than any other structure

87 Perfect competition Example: Agricultural products

88 Monopolistic Competition

89 Characteristics of monopolistic competition Number of firms: hundreds of small companies Choice for consumers: many Type of Good: product DIFFERENTIATION Market Entry: easy, little barriers to entry Amount of competition: significant amount; non-price competition

90 Examples: monopolistic competition Retail stores Restaurants Pizza

91 Oligopoly Number of firms: Few large companies Choice for Consumers: Few Type of Good: similar or different from one another Market entry: difficult to enter; barriers exist Amount of Competition: LITTLE One firm’s actions have impact on other firms Brand name recognition important

92 Examples: Oligopoly Soft drinks Cereal Athletic apparel

93 Example of how one firm in oligopoly impacts another

94 94 Monopoly Number of firms: Single Seller Choice for consumers: ONE Type of Good: unique; no substitutes Amount of Competition: none (usually illegal because of this) Market Entry: Impossible

95 Example: Monopoly Utility companies

96 ID the market structure Business 1: I ’ ve got plenty of competition. If I tried to raise my price, I ’ d lose business to the large firms that dominate our industry. I wait for them to raise prices and I follow along behind.

97 Business 2: New shops like mine are opening all the time – there are hundreds of us. I have to spend money on advertising to convince people that my shop is unique and different.

98 Business 3: I can ’ t afford to advertise; it would eat up what little profit I make. Besides, what good would it do? My product is the same as everyone else ’ s.

99 Business 4: My product is like no one else ’ s. I work hard to make sure my firm stays out in front to avoid cutthroat competition.

100 Intellectual Property Intellectual Property includes: secret formulas, ideas, inventions (products and processes), industrial designs, literary and artistic works (novels, films, music, architectural designs and web pages) Intellectual property is protected by: 1.Patents 2.Copyrights 3.Trademarks

101 Patents legal right to exclude anyone else from manufacturing or marketing an invention Last for 20 years.

102 Strange patents ??? Anti-eating face mask Gerbil shirt

103 Copyrights protect written or artistic expressions - novels, poems, songs or movies. Lasts for the life of the author plus 50 years.

104 Famous copyright cases S. Victor Whitmill v. Warner Bros. Entertainment Inc. Tatoo (like Mike Tyson ’ s) in The Hangover Part 2. Warner Bros. and Whitmill worked out an agreement of undisclosed terms.

105 Mattel Inc. v. MGA Entertainment Inc. MGA Entertainment filed a lawsuit against Mattel, claiming that the line of My Scene Barbies copied the big- headed and slim-bodied physique of Bratz dolls

106 The Happy Birthday Song The copyright belongs to Warner Music Group, and the company regularly charges up to $30,000 to anyone who wants to use the song for profit

107 Trademarks Name, phrase, sound or symbol used in association with services or products.

108 Famous Trademarks “That’s hot!”“You’re Fired!”

109 “Fear the brow”“Let’s get ready to rumble”

110 “There’s an app for that” “BAM!”

111 Profit Topic 8: PERFECT Competition REVIEW Many small firms (thousands) Identical products (perfect substitutes) Easy for firms to enter the industry Firms are “Price Takers” The seller has NO control over price. Can only control Quantity they are producing 111

112 Demand for Perfectly Competitive Firms Why are they Price Takers? If a firm charges above the market price, NO ONE will buy. Consumers will go to other firms There is no reason to lower price because consumers will buy the same amount at the market price. Since the price is the same at all quantities demanded, the demand curve for each firm is… Perfectly Elastic (A Horizontal straight line) 112

113 P Q PRICE P Q 5000 D S Industry Firm (price taker) $15 The Competitive Firm is a Price Taker Price is set by the Industry 113

114 If price changes in the market, it will also change in the FIRM

115 115 What is the additional revenue for selling an additional unit? 1 st unit earns $15 2 nd unit earns 30 (15 more) Marginal revenue is constant at $15 Notice: MR=D=AR=P P Q Demand Firm (price taker) $ MR=D=AR=P The Competitive Firm is a Price Taker Price is set by the Industry

116 116 What is the additional revenue for selling an additional unit? 1 st unit earns $15 2 nd unit earns $15 Marginal revenue is constant at $15 Notice: Total revenue increases at a constant rate MR equal Average Revenue P Q Demand Firm (price taker) $ MR=D=AR=P The Competitive Firm is a Price Taker Price is set by the Industry For Perfect Competition: MR=D=AR=P

117 Topic 9: Maximizing PROFIT in perfect competition 117

118 Short-Run Profit Maximization What is the goal of every business? To Maximize Profit!!!!!! To maximum profit firms must make the right output How does a firm decide the right output???? MR< MC don’t produce MR> MC produce 118

119 How many products should this perfect competitive firm produce??? Price of item is $20.00 TP TC MC MR

120 How many products should this perfect competitive firm produce??? Price of item is $20.00 TP TC MC MR What is the firm’s profit at this point??? TR-TC $20.00

121 *Profit would still be made at TP of 5, but profit not maximized Price of item is $20.00 TP TC MC MR Profit at TP of 4 = $20 Profit at TP of 5 = $10

122 122 Profit Maximizing Rule MR=MC

123 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit

124 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit Increasing, diminishing and negative returns???

125 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit

126 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit

127 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit

128 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit In PC, Marginal revenue = price of product (remember MR=D=AR=P)

129 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit In PC, Marginal revenue = price of product (remember MR=D=AR=P)

130 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit

131 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit How many products should this firm produce to maximize its profits ????

132 # of work ers TPMPFCVCTCAFCAVCATCMCTRMRprofit

133 MC in Perfect competition Upward sloping part of MC curve = Supply of firm MC=S

134 MR = MC in perfect competition Firm will produce the Q where MR=MC to maximize profit

135 Topic 10: Perfectly competitive firm in the short run 1. It can make a profit 2. Break even NORMAL PROFIT 3. Have a loss Firm will produce where MR=MC

136 1. Profit P > ATC profit

137 2.Break even point price = ATC ATC

138 3. LOSS P < ATC ATC LOSS

139 Shut Down Rule A firm should continue to produce as long as the price is above the AVC When the price falls below AVC then the firm should minimize its losses by shutting down Why? If the price is below AVC the firm is losing more money by producing than they would have to pay to shut down.

140 If price changes in the market, it will also change in the FIRM and the firm should adjust their output Example: increase in S lowers P

141 Practice 141

142 Practice What Quantity will this firm produce? What is this firm’s total revenue? What is this firm’s total cost? Is this firm experiencing a profit or loss? How much? $20 ATC AVC

143 ` 1 What Quantity will this firm produce? 2 What is the TR at this quantity? 3 What is the TC at this quantity? 4 Profit or Loss? How much?

144 Topic 11:Perfectly competitive firm in the Long run

145 Perfectly competitive firm in the long run P=MR=MC=SRATC= LRATC All Perfectly competitive firms in the LORNG RUN earn a NORMAL economic profit (profit is 0)

146 Perfectly competitive firm in the Long run

147 In the long-run, what happens when economic profits are made? When firms make profits, other firms enter the industry – this causes supply to increase which causes prices to go down When prices go down, profits go down

148 In the long-run, what happens when losses are made? When firms incur a loss, firms start to leave the industry – this causes supply to decrease which causes prices to go up When prices go up, profit goes up

149 Topic 12: Efficiency Perfectly competitive markets are perfectly efficient They have BOTH productive and allocative efficiency in the long run 149

150 Productive Efficiency Price = Minimum ATC The production of a good in a least costly way. Graphically it is where… 150

151 P D=MR Q MC ATC Quantity Price Notice that the product is being made at the lowest possible cost (Minimum ATC) Long-Run Equilibrium 151

152 Allocative Efficiency Price = MC Producers are making the products most wanted by society. Graphically it is where… 152

153 P MR Q MC Quantity Price Long-Run Equilibrium Optimal amount being produced 153

154 P D=MR Q MC ATC Quantity Price P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! Long-Run Equilibrium 154


Download ppt "Microeconomics Unit 2 Production, cost, profit and perfect competition."

Similar presentations


Ads by Google