Topic 3 Industry Analysis and Costs of Production(2) (1)

8/17/2019 Topic 3 Industry Analysis and Costs of Production(2) (1)

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Prices and Markets – ECON1194

Topic 3: Industry Analysis

Costs o! Production


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Prices And Markets "

Lecture OutlineA. Industry Analysis:

1. The Firm

2. Industry analysis: the SCP paradigm

# Maret Structures

!. Pr"ducti"n C"sts and Firms# Pr"$its

%. Pr"ducti"n and C"sts:

1. C"sts and Pr"$its: s"me c"ncepts

2. Pr"ducti"n in the sh"rt&run

# TP$ AP and MP

# %a& o! di'inis(in) returns

!. C"sts in the sh"rt&run

# TC$ AC and MC

'. C"sts in the l"ng&run# Econo'ies o! scale

# *isecono'ies o! scale

# Mini'u' e!!icient scale

+MIT ,ni-ersity .ietna'/3002"01


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+ecall your learnin) o! prelecture acti-ities

Share y"ur understanding "$ the paradigm (Structure ) C"nduct )

Per$"rmance* t" the pers"n ne+t t" y"u:

5(at is a !ir'6

7777777777777777777777777777777777777777777777777777777

5(at in!or'ation does t(e concept 8'arket structures con-ey6 7777777777777777777777777777777777777777777777777777777

5(at are t(e !ir's conducts6

7777777777777777777777777777777777777777777777777777777

5(at are 'easured in 8per!or'ance o! t(e ;CP paradi)'6

77777777777777777777777777777777777777777777777777777777


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I,-ST/0 A,AL0SIS

Part A

+MIT ,ni-ersity .ietna'/3002"01Prices And Markets 4


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1? T(e !ir'

T(e !ir' is a planning unit &(ic( produces )oods @outputs usin) !actors o! production @inputs

!or !inancial return?

Bir's (a-e t(e responsi>ility to 'ana)e a lar)e proportion o! societys producti-e resources?

Econo'ists &ant to kno& &(et(er t(is steardship is e!!icient?

To !ind out$ econo'ists >uild 'odels o! t(e !ir' >ased on assu'ptions? T(ese

'odels are t(en analyed !or euili3rium and e$$iciency?

+MIT ,ni-ersity .ietna'/3002"01Prices And Markets


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"? Industry analysis: t(e ;CP paradi)'

T(e Structure-Conduct-Performance @;CP paradi)' pro-ides a structured$rame"r to study t(e !ir'?

*e-eloped >y Doe ain @199$ used as a startin) point !or analysin) 'arkets

and industries?

T(e performance o! a 'arket is deter'ined >y t(e conduct o! t(e !ir's &it(in

t(e 'arket &(ic( in turn is deter'ined >y t(e structure o! t(e 'arket?

A causal relations(ip:

# Per$"rmance: 'arket e!!iciency @social &el!are$ consu'er surplus$ pro!its?

# C"nduct: (o& !ir's >e(a-e in a )i-en 'arket structure @pricin) strate)ies$

ad-ertisin)$ researc( and de-elop'ent?

# Structure: t(e co'petiti-e en-iron'ent in t(e 'arket?

;T+,CT,+E CON*,CT PE+BO+MANCE

+MIT ,ni-ersity .ietna'/3002"01Prices And Markets F


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"? Industry analysis: 'arket structuresMarket structure descri>es t(e c"mpetiti4e en4ir"nment in &(ic( !ir's operate?

It is deter'ined >y !our c(aracteristics &(ic( deter'ine (o& !ir's >e(a-e @conduct and (o& e!!icient t(e

'arket is @ performance?

T(ese yield !our types o! 'arket structure:

Per$ectc"mpetiti"n

5lecture 67

M"n"p"listicc"mpetiti"n

5lecture 67

Olig"p"ly5lecture 187

M"n"p"ly5lecture 97

1 Nu'>er o! !ir's 'any 'any !e& one

2 Bir' sie s'all s'all lar)e -ery lar)e

! Entry >arriers no no si)ni!icant !ull @pro(i>iti-e

'Productdi!!erentiation

no so'e possi>le na

Increasing maret p"er and c"ncentrati"n decreasingc"mpetiti"n

Bor eac($ &e &ant to study: @&ill >e discussed in 'ore details in t(e co'in) &eeks

# Structure: t(e rele-ant costs$ re-enues and associated cur-es !or a !ir' in t(e particular 'arket structureG# Conduct : ,se t(ese to deter'ine (o& t(e !ir' decides (o& 'uc( H to produce and (o& 'uc( P to c(ar)e$

>ot( in t(e s(ort and lon) runG and# Performance: &(et(er t(ese decisions lead to e!!iciency?

+MIT ,ni-ersity .ietna'/3002"01Prices And Markets


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3? Pro!it 'a=i'iation – i'portant to o>ser-e c(an)es in

production costs:

Neoclassical econo'ics assu'es t(at t(e 'ain o>Jecti-e o! t(e !ir' is to

ma+imise its profits.

*e!inition: pr"$it is total re-enue 'inus total cost [ Profit = TR – TC ]

# T"tal re4enue @T+ K total output produced @and sold @H = price per unit @P

# T"tal c"st @TC K total output produced @H = cost per unit @C

To identi!y (o& to produce to 'a=i'ie pro!its$ t(e !ir' needs to kno& (o& its re-enues and

costs c(an)e as it produces 'ore?



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+ecall your learnin) o! Prelecture Acti-ities

•Lo& are production costs in relation to !ir's

returns6

–5(en do !ir's e=perience econo'ic

e!!iciency6

E=plain >y relatin) t&o !ollo&in) concepts:

# Costs o! inputs

#.alues o! outputs# +e!er to t(e -ideo clip on : 8Production Costs and

+eturns: (ttps:&&&?youtu>e?co'&atc(6-KI-o=kAlE&


https://www.youtube.com/watch?v=IqvoxkBAlEwhttps://www.youtube.com/watch?v=IqvoxkBAlEw


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P/O-CTIO, A,- COSTS

Part



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1. C"sts and Pr"$its: s"me c"ncepts

Acc"unting


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Practise

CO;T; OB+,NNIN< CAQE ,;INE;;

.N*

Blour$ e))s$ su)ar$ ot(er in)redients 10 'illion

5a)es " 'illion

Interest pay'ents on loan to >uyo-ens

0?1 'illion

Electricity 0?2 'illion

+ental !ee !or store 0? 'illion

Bor)one salary 3 'illion

Bor)one interest 0?" 'illion

+MIT ,ni-ersity Prices And Markets 13

What are the explicit costs? What are the implicit costs?

- f the total re!enue is "# million$ %hat is the accountin&

profit of this 'usiness? What is the economic profit?


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2. Pr"ducti"n in the sh"rt&run

•-istincti"n 3eteen sh"rt&run = l"ng&run•Pr"ducti"n in the sh"rt&run:

1) Total product (TP), average product (AP) and marginal

product (MP)2) Calculation of them

3) Relations among TP, AP and MP

) !a" of #iminishing Returns



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Cake >usiness

•Inputs: –Blour

–E))s

–;u)ar

–Milk

–%a>our &orkers

–O-ens

–Qitc(en@s

–Mac(ines

• Outputs: caes



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>hat c"sts "$ inputs are changing hat are n"t

hen "utput changes?

•

Blour • Milk

• ;u)ar

• E))s

Are changing@ hen "utput changes aria3le inputs

# %a>our

# O-en

# Qitc(en

Are n"t changing@ hen "utput changes Fi+ed inputs

+MIT ,ni-ersity Prices And Markets 1F


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A$ter ' years "ur cae 3usiness 3ec"mes mass&

pr"ducti"n@ pr"ducing hundreds "$ caesuy 'ore o-ensR

• 5e >uy a 'ac(ine to increase t(e

producti-ity$R

• 5e >uy a ne& >i))er kitc(enR

Labour, ovens, kitchen, and machine

are all variable inputs…

after 4 years of business.



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;(ortrun Production %on)run Production

•Sh"rt&run pr"ducti"n: is the pr"ducti"n in s"meperi"d "$ time that at least there is a $i+ed input.

The ca(e production after " )ear*

– All in)redients @!lour$ e))s$ su)ar$R la>our are

-aria>les inputs? – Capital @o-en$ kitc(en$ and 'ac(ine is a !i=ed inputR

• L"ng&run pr"ducti"n: is the pr"ducti"n $"r s"me

peri"d "$ time that all inputs are 4aria3le.

The ca(e production after + )ear*

–In)redients$ la>our and e-en capital are all -aria>le

inputs?



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Caculate AP% MP%

• AP% K Output %a>or input K H%

•MP% K C(an)e in output C(an)e in

la>or inputK H%

K deri-ati-e o! HK B@Q$%

•

+MIT ,ni-ersity Prices And Markets "0


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T(e po&er rule

I! ) = x n

t(en


mechanics of the power rule*

n drops do&n: t(en inde= looses 1

) x n

=

)i-in)

To !ind 'a= or 'ini'u' set dyd= K o

d

d

y

x nx

n

=−1

d

d

y

xnx

n

=−1


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Po&er rule: E=a'ples

+MIT ,ni-ersity Prices And Markets ""


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TP APL = MPL


Am"unt "$La3"ur 5L7

Am"unt "$Capital 5B7

T"tal Output57

0 " 0

1 " 10

" " 30

3 " F0

4 " 20

" 9

F " 102

" 11"

2 " 11"9 " 102

10 " 100

A4eragePr"duct

&

18

1D

28

28

19

16

1E

1'12

18

MarginalPr"duct

&

18

28

!8

28

1D

1!

'

8&'

&6


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0 " 4 F 2 10 1"

TP

La3"r per m"nth

Output per m"nth


0 " 4 F 2 10 1"

AP = MP

La3"r per m"nth

Outputper 1"rerper m"nth

28 AP

MP

H'a=

MP K 0

;


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+elations a'on) TP$ AP% MP%• TP = MPL:

–TP increases MP% is positi-e?

–TP decreases MP% is ne)ati-e?

– TP max %hen 2P 0 = 3.

– 2P 0 is the slope of TP.

• APL = MPL:

–MP% S AP% AP% is increasin)?

E?)? addin) t(e 3rd &orker >rin)s MP% S AP%$ 'akin) AP% )reater?

– MP% AP% AP% is decreasin)?

E?)? addin) t(e Ft( &orker >rin)s MP% AP%$ 'akin) AP% s'aller?

– MP% 'eets AP% at t(e 'a= AP% ?+MIT ,ni-ersity Prices And Markets "


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In-estin) in 'ac(ines in lon)run decreases ATC

@*ecreasin) lon)run cost cur-e

dvanta!es"- TP @a day: t(ousands o! units

- Per!or'ance o! la>or: (i)(?

- Ly)ienic spacious !actory?

- %ess pro>le's in (u'an 'ana)e'ent$

etc?

Problems"

- TP @a day: (undreds o! units

- ,nderper!or'ance pro>le': %a>or 'ay not >e

&elleuipped in a cro&ded !actory?

- Huality o! cakes @s(ape$ taste$??: 'ay not >e

consistent

- Many (u'an con!licts 'ay occur?

- Not enou)( spaces !or 'o-e'ents$ etc?

0ecturer* 0e 4i 5n Tam - 63 2arch$ 73"6+MIT ,ni-ersity "FPrices And Markets


27/40

%a& o! di'inis(in) 'ar)inal returns

Addin) 'ore and 'ore

&orkers to t(e sa'e uality o!cake o-ens$ &orkers &ould

>e)in to )et in eac( ot(ers

&ay$ MP% >eco'es to decline

!allin) total output at t(eend?

+MIT ,ni-ersity Prices And Markets "

Law of diminishin! returns" 85ddin& more of a !aria'le

input$ such as la'or$ to the same amount of a fixed input$such as capital$ %ill e!entuall) cause the mar&inal product

of the !aria'le input to decline9.


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Total Cost in ;(ortrun

•;(ortrun total cost K Total !i=ed cost Total -aria>le cost

STC TFC G TC

–#i$ed cost" a cost t(at does not -ary &it( t(e le-el o!

output?

–%ariable cost" a cost t(at -aries as output -aries?

• &otice" fixed costs o!er a short time period can 'ecome

!aria'le costs in lon&-run: refer to* fixed inputs and

!aria'le inputs$ slide ";1.

Total cost !unction: TC K BC &%

@assu'e %a>our @% is t(e only -aria>le cost$ &: &a)es

!or la>our



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Mar)inal Cost

•Marginal c"st 5MC7: increase in cost resultin) !ro' t(eproduction o! one e=tra unit o! output?

• MC change in 4aria3le c"st< change in "utput

change in t"tal c"st< change in "utput

HC< H

HTC< H

deri4ati4e "$ TC $uncti"n


2C measures ho% much it %ill cost to expand

output ') one unit.


30/40

A-era)e Total Cost$ A-era)e Bi=ed

Cost A-era)e .aria>le Cost

• A-era)e total cost @ATC: !ir's total cost di-ided >y itsle-el o! output?

ATC TCy t(et(e le-el o! output?

AFC FCle cost @A.C: is t(e -aria>le cost di-ided

>y t(e le-el o! output?AC C


31/40

A !ir's s(ortrun costs

+ate o!

Output

Bi=ed

cost

.aria>le

cost

Total

cost

Mar)inal

Cost

ABC A.C ATC

0 0 0 0

1 0 0 100 0

" 0 2 1"2 "2

3 0 92 142 "0

4 0 11" 1F" 14

0 130 120 12

F 0 10 "00 "0

0 1 "" "

2 0 "04 "4 "9

9 0 "4" "9" 32

10 0 300 30 2

11 0 32 43 2+MIT ,ni-ersity Prices And Markets 31

ABC A.C ATC

& &

D8 D8 188

2D !9 E'

1E. !2. '9.!

12.D 26 '8.D

18 2E !E

6.! 2D !!.!

.1 2D !2.1

E.! 2D.D !1.6

D.E 2E.9 !2.'

D !8 !D

'.D !D !9.D


32/40

+elation >et&een MC MP%

•MC K U.C UH –.C K &% @la>our is t(e only -aria>le cost

–U.C K & U%

MC K & U% UH

• MP% K UH U%

MC < MPL

T(is euation 'eans t(e ne)ati-e relations(ip >et&een MC MP%* %hen there is one !aria'le input$ such as la'or$ the mar&inal

cost %ill increase %hen mar&inal product of la'or is lo%. Con!ersel)$ a

hi&h mar&inal product means that the la'or re


33/40

T(e s(apes o! MC MP%


0 " 4 F 2 10 1"

MP

La3"r per m"nth

Outputper 1"rer

per m"nth

1 " 3 4 F 2 9 10 110

"

0

100MC

MP increases

MC

decreases

MP decreases

MC increases

MC has &shape


34/40

+elation >et&een MC A.C

• 5(en MC A.C$ A.C decreases

• 5(en MC S A.C$ A.C increases


1 " 3 4 F 2 9 10 110

"

0

100

MC

AC


35/40

ABC decreases &(en output increases


+ate o!

Output

Bi=ed

cost

Total

cost

ABC

0 0 0

1 0 100 D8

" 0 1"2 2D

3 0 142 1E.

4 0 1F" 12.D

0 120 18

F 0 "00 6.!

0 "" .1

2 0 "4 E.!

9 0 "9" D.E

10 0 30 D

11 0 43 '.D 1 " 3 4 F 2 9 10 110

"

0

100AFC


36/40

+elation >et&een ATC$ A.C$ ABC and MC

+MIT ,ni-ersity Prices And Markets 3F

1 " 3 4 F 2 9 10 110

"

0

100

MC

ATC

AC

AFC

T(e distance

>et&een ATCand A.C is

ABC$ &(ic(

)ets s'aller as

H increases

MC cuts >ot(

a-era)e cost

cur-es at t(eir

'ini'u'


37/40

Prices And Markets

OutputO

C

o s t s

0R5C Econo'ies

o! scale

Constant

+eturns to

scale

*isecono'ies

o! scale

Copyright 2001 Pearson Education

1 "

%on)run A-era)e Cost Cur-e

Increasin) e!!iciency:

A-era)e costs !allin)

e=a'ple:

*ou>le

inputs And see

outputs

dou>le

*ecreasin) e!!iciency:

A-era)e costs increasin)

Mini'u' e!!icient scale

+MIT ,ni-ersity 3


38/40


;c"n"mies and -isec"n"mies "$ Scale

;c"n"mies "$ scale are t(e cost ad-anta)es t(at a >usiness o>tains due to

e=pansion? T(ey are !actors t(at cause a producers a-era)e cost per unit to!all as production is increased?

-isec"n"mies "$ scale are t(e !orces t(at cause lar)er !ir's to produce

)oods and ser-ices at increased perunit costs?


39/40

Econo'ies o! scale

;c"n"mies "$ scale V As a !ir' dou>les output &it( total cost o! inputs less

t(an dou>lin)R?

1? I! t(e !ir' operates on a lar)er scale$ &orkers can specialie in t(e acti-itiesat &(ic( t(ey are 'ost producti-e?

"? ;cale can pro-ide t(e !le=i>ility? y -aryin) t(e co'>ination o! inputs

utilied to produce t(e !ir's output$ 'ana)ers can or)anie t(e production

process 'ore e!!ecti-ely?

3? T(e !ir' 'ay >e a>le to acuire so'e production inputs at lo&er cost>ecause it is >uyin) t(e' in lar)er uantities and can t(ere!ore ne)otia>le

>etter prices?



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*isecono'ies o! scale: Causes

-isec"n"mies "$ scale V As a !ir' dou>les its

output$ t(e total cost o! inputs 'ore t(an dou>les?

*uplication o! e!!ortV 5(en !ir's )ro& to t(ousands o! &orkers$ it is ine-ita>le

t(at so'eone$ or e-en a tea'$ &ill take on a proJect t(at is already >ein)

(andled >y anot(er person or tea'?

Top(ea-y co'paniesVT(e 'ore e'ployees a !ir' (as$ t(e lar)er percenta)e

o! t(e &ork!orce &ill >e W'ana)e'entW? I! a 'ana)er does not(in) ot(er t(an

'ana)e t(e &orkers under t(e'$ t(en t(e producti-ity o! t(e !ir' (as >een

reduced?

InertiaV un&illin)ness to c(an)e$ >ecause X&e-e al&ays done it t(at &ay?

Canni>aliationV a s'all !ir' only co'petes &it( ot(er !ir's$ >ut lar)er !ir's

!reuently !ind t(eir o&n products are co'petin) &it( eac( ot(er?

Inelasticity o! ;upplyV a co'pany &(ic( is (ea-ily dependent on its resource

supply &ill (a-e trou>le increasin) production? Bor instance a ti'>er co'pany

can not increase production a>o-e t(e sustaina>le (ar-est rate o! its land?
http://en.wikipedia.org/wiki/Diseconomies_of_scalehttp://en.wikipedia.org/wiki/Diseconomies_of_scale

Documents

Topic 3 Industry Analysis and Costs of Production(2) (1)