1、aleveleconomics基础讲义基础讲义21 What is Economics about?The problem of scarcity Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants. Human wants are unlimited, but Resources are limited (scarce) A centra
2、l problem therefore existswe call this the problem of SCARCITY43 Definition of economicsEconomics is the study of societys decisions about production consumption allocation of scarce resources in order to satisfy as many unlimited wants as possible.54 Two branches of economics Microeconomics is the
3、branch of economics that studies decision-making by a single individual, household, firm, industry or level of government. Macroeconomics is the branch of economics that studies decision-making for the economy as a whole.65 Macroeconomic Issues aggregate demand, aggregate supply economic growth unem
4、ployment inflation balance of trade exchange rates76 Microeconomic Issues demand and supply decisions of what to produce, how to produce, for whom to produce the concept of opportunity cost based on comparing what you have decided vs what is the next best alternative you have given up rational decis
5、ion making based on cost vs benefit; best value for money weighing up marginal costs and marginal benefits based on comparing the extra benefit with the extra cost the social implications of choice society i.e. taking into consideration how a certain choice may have an indirect cost on ResourcesReso
6、urces are the basic categories of inputs used to produce goods and services.Resources can also be called the factors of production.Three categories of resourcesLandLabourCapitalResources: landAny natural resource provided by nature used in the process of productionFor example: forests, minerals, wil
7、dlife, oil, rivers, lakes, oceansMay be renewable or non-renewable Resources: labourThe mental and physical capacity of workers to produce goods and servicesFor example: farmers, nurses, lawyersEntrepreneurship is a special type of labour the creative ability of individuals to manage the combination
8、 of resources to produce products.EntrepreneurshipOrganises and manages the resources needed to produce goods and servicesResources: capitalCapital is the physical plant, machinery and equipment used to produce other goods. That is, human-made goods that do not directly satisfy human wants, for exam
9、ple:Earlier: axe, bow and arrowNow: buildings, production equipment, software, factories.A note about financial capitalEconomists do not include money in their definition of capital money simply gives a measure to the value of assets.Opportunity costThe best alternative sacrificed for a chosen alter
10、nativeOpportunity cost applies to personal, group and national decision-making, for exampleWhat could you be doing if you were not currently studying?How many new roads have to be forgone if the government spends tax revenues on homeland security?Marginal analysisMarginal analysis examines how the c
11、osts and benefits change in response to incremental changes in actions. Any additional action by an individual or a firm, such as buying an additional pair of shoes or increasing production of a product by an additional unit, brings additional cost. The central question in marginal analysis is wheth
12、er the expected benefits of that action exceed the added costMarginal analysisMarginal analysis helps businesses and individuals balance the costs and benefits of additional actions-whether to produce more, consume more, or other decisions-and determine whether the benefits will exceed costs, thus i
13、ncreasing utility. Marginal analysisMarginal analysis benefits government policy makers, as well. Weighing the costs and benefits can help government officials determine if allocating additional resources to a particular public program will generate additional benefits for the general publicShort-Ru
14、n v Long RunShort-Run: A time period in which at least one factor of production is fixed (i.e. cannot increase its amount)it is not defined in terms of number of days/weeks)Long Run:A time period long enough for all inputs to be variedIt is not a defined period of time;Cost conceptsTotal fixed costs
15、 are coststhat do not vary as output varies and must be paid even if output is zero.Total variable costs are coststhat are zero when output is zero andvary as output varies.Total cost is the sum of fixed cost and variable cost.TC = TFC + TVCTotal costsNote: The x and y axis units here are unrelated
16、to the previous diagramAverage cost conceptsAverage fixed cost (AFC) total fixed cost divided by the quantity of output produced:Average variable cost (AVC) total variable cost divided by the quantity of output produced:AFC = TFCAVC = TVCQQAverage total costTotal cost divided by the quantity of outp
17、ut producedATC = AFC + AVC = TCQMarginal costMeasures how much total cost increases when an additional unit of output is produced.MC : the change in total cost when one extra unit of output is producedMC = TC = TVCQQTotal costsInverse relationship: MP & MCNote: The x and y axis units here are unrela
18、ted to the previous diagramAverage and marginal costsThis graph uses information from the previous slideNote the marginal-average ruleWhen MC AC, AC is rising.When MC = AC, AC is at its minimum point.Long-run situationAll factors of production are variable.there is time for the firm to build a new f
19、actory to install new machines, to use different production techniques, to combine inputs in whatever proportion and quantities it chooses;the firm will need to decide about the scale of its operation and the production techniques that it uses; these decisions will affect production costs so it is i
20、mportant to get these decisions right.Relation between LRAC and SRAC CurvesA firm with just one factory and faces SRAC curve (following diagrams);In the long-run it can build more factories and experiences economies of scale due to administrative savings, each successive factory will allow it to pro
21、duce with a new lower SRAC curve;Thus with 2 factories it will have curve SRAC2 and with three then SRAC3, and so on;Each SRAC curve corresponds to a particular amount of the factor that is fixed in the short-run (in this case the factory);There are many SRAC curves as many different factories of di
22、fferent sizes or extensions to existing one could be made.The LRAC curve is an ENVELOPE CURVECostsOutputOExamples of short-runaverage cost curvesSRAC1SRAC2SRAC3SRAC4SRAC5Constructing a Long-run Average Cost Curve from Short-run Average Cost CurvesLRACCostsOutputOSRAC5SRAC4SRAC3SRAC2SRAC1Constructing
23、 a Long-run Average Cost Curve from Short-run Average Cost CurvesScales of productionThe long-run average cost curve is U-shaped.This reflects returns to scale three types are recognised:Economies of scale (LRAC falls as output rises)Constant returns to scaleDiseconomies of scale (LRAC rises as outp
24、ut rises).Scales of productionEconomies of scaleA situation in which the long-run average cost curve declines as the firm increases outputSources of economies of scale:Specialisation and Division of LabourGreater efficiency of larger machines (eg combine harvester, super photocopier. Eg machine A co
25、sts $1000 & produces 1000 units daily. Machine B costs $4000but can produce 8000 units daily. Unit cost is $1 vs $0.50.)By productsOrganisational economies (centralise admin or I.T. support functions; eliminate duplication)Financial economies (bulk discounts)Economies of Scope (producing a range of
26、products may increase sales and spread out overheads Eg: CD, DVD, players, amplifiers etc vs only CD) (Refer to Sloman p87,88 for more info)Constant returns to scaleA situation in which the long-run average cost curve does not change as the firm increases output.Diseconomies of scaleA situation in w
27、hich the long-run average cost curve rises as the firm increases outputSources of diseconomies of scale:BureaucracyBarriers to communicationManagement difficulties (e.g. lack of coordination).Production-line processes and interdependenciesLong-run Costs “To Scale” means that all inputs increase by t
28、he same proportionDecreasing returns to scale are quite different from diminishing marginal returns (where only the variable factor increases)DMR (short-run) and DRS (long-run)Profit MaximisationSloman Ch 5BUECO1507RevenueDefining total, average and marginal revenue total revenue: TR = P Q average r
29、evenue: AR = TR / Q marginal revenue: MR = TR / QRevenueRevenue curves when price is not affected by the firms output (horizontal demand curve) average revenue (AR) marginal revenue (MR)Examining revenue curves in 2 situations1) If a firm is very small relative to the whole market.2) If a firm has a
30、 relatively large share of the marketOOAR, MR ($)PeSDD = AR= MRQ (millions)Q (hundreds)(a) The market The firmBeing so small, its output, whatever it is, does not affect market price at allAverage Revenue and Marginal Revenue curves(1) of a firm that is very SMALL relative to the whole market.(Price
31、-taking firm)Price ($)TRQuantity(units)020040060080010001200Price = AR= MR ($)5555555TR($)0100020003000400050006000Total Revenue curve(1) of a firm that is very SMALL relative to the whole market. (Price-taking firm)QTR ($)Q(units)1234567P =AR($)8765432TR($)8141820201814MR($)6420-2-4MRAR, MR ($)Quan
32、tityARAverage Revenue and Marginal Revenue curves(2) of a firm that has a relatively LARGE share of the whole market. If such a firm wants to sell more, it can only do so by lowering price. If it chooses to raise its price, it will have toaccept lower sales. Therefore AR (price) slopes downward. How
33、 about the MR curve?Q(units)1234567P =AR($)8765432TR($)8141820201814MR($)6420-2-4MRAR, MR ($)QuantityARAverage Revenue and Marginal Revenue curves(2) of a firm that has a relatively LARGE share of the whole market. Supposing firm is selling 2 units at $7each. It can sell the 3rd unit only by reducin
34、g the price of all units to $6. Selling the 3rd unit gains $6 but reducing theprice of units 1 & 2 loses $1x2=$2. MR therefore = $6-$2=$4TRTR ($)Quantity(units)1234567P = AR($)8765432TR($)8141820201814Total Revenue curve(2) of a firm that has a relatively LARGE share of the whole market.QuantityReve
35、nue curves and price elasticity of demandElasticity = -1Elastic (a)Inelastic (b)AR, MR ($)QuantityMRARRevenue curves and price elasticity of demandRecall: a) When demand is elastic and priceis reduced, total revenue increases.Total revenue increasing means MR is positiveb) When demand is inelastic a
36、nd price is reduce, totalrevenue decreases. Total revenue decreasing meansMR is negativeTRElasticity = -1ElasticInelasticTR ($)TR Curve for a Firm Facing a Downward-sloping Demand CurveQuantityRevenueRevenue curves when price varies with output (downward-sloping demand curve) average revenue (AR) ma
37、rginal revenue (MR) total revenue (TR) revenue curves and price elasticity of demandShifts in revenue curvesHiddenDetermining a)Output where profit is maximisedb) Profit at that output1) Using total curves maximising the difference between TR and TC2) Using marginal and average curvesTR, TC, TP ($)T
38、P TRTCdefQuantity1) Using total curvesa) Profit is maximized when output is 3b) Maximum profit is d-eQuantityCosts and revenue ($)eMRMCProfit-maximisingoutput2a) Using marginal and average curvesto determine profit maximising outputa) Profit is maximized at output of 3Below 3 units, the firm should
39、increase output because there will be a bigger addition to revenue (MR) than to cost (MC). Beyond 3 units additional cost (MC) is bigger than additional revenue (MR) therefore shouldnt go beyond it 6.00 4QuantityCosts and revenue ($)MCACARbaTotal profit =$1 x 3 = $4.00 2b) Using marginal and average
40、 curvesto measure maximum profitTotal ProfitMRLOSSOCosts and revenue ($)QuantityMCACARMRQACAR2b) Using marginal and average curvesto determine loss minimising outputThe shutdown ruleIf price drops below the AVC curve, the revenue from each unit produced does not even cover the variable cost/s of pro
41、duction.The firm should shut down.Illustration:(A)(B) (C) (D)Sales$60 0 60 60VC(40) 0(70)(60)Gross profit 20 0(10) 0FC(30) (30)(30)(30)Loss(10) (30)(40)(30)The shutdown rule (cont.)(MR)Need to changeRevenue, Costs and ProfitSome qualifications long-run profit maximisation the meaning of profit loss
42、minimising: still produce where MR = MC short-run shut-down point: P = AVC long-run shut-down point: P = LRACHiddenNormal, Supernormal, Economic profitNormal profit: The minimum profit necessary to keep a firm in operation (i.e. $85,00 in the example)A firm that earns normal profit has earned enough to cover its opportunity cost.If you earn more than opportunity cost you are earning Supernormal (or Economic) profit. Accounting profit, Normal profit, Supernormal profit, Economic profit
