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0. Profit
- motivation
of entrepreneur
- normal:
opportunity cost return to the entrepreneurial factor of production
- economic:
anything in excess of normal profit; concerned about situations when
economic profits exists (MBB
10th Ed.
Fig. 7.1; MBB 11th Ed. Fig. 6.1; PB not displayed)
In effect, as with Demand, there
are two equations that structure analysis:
a) Q = g (K, L) or the production
function
b) C = PkK + PlL
of the cost constraint
1. Short- & Long Run
-
VSR or market period when no
additional output is possible
-
SR:
when at least one input is fixed (because of market prices and technological
constraints of fixed factor of production) but quantities of other inputs
can be varied
-
LR:
when all inputs can be varied
-
not
calendar time; rather time it takes to convert a fixed into a variable input
-
in
this way Economics incorporates time as a variable and ‘dynamic’
analysis becomes possible, i.e. what will the future be; in this sense
‘predictive’ not just ‘descriptive’
2. Production in the Short-Run
-
by
definition, one input of production fixed
-
during
this period the firm can produce varying levels of output based ONLY on how
much variable input is used – Total Product (MBB
10th Ed.
Fig. 7.2; MBB 11th Ed. Fig. 6.2; PB 4th Ed. Fig 11.1;
5th Ed. Fig. 10.1); at each level
of output one can measure the Average Product (MBB
10th Ed.
Fig. 7.6; MBB 11th Ed. Fig. 6.6; PB 4th Ed. Fig 11.3;5th
Ed. Fig 10.3) produced
per unit of the variable input; at each level of output one can measure the
increase in output per unit increase of the variable input – Marginal
Product (MBB
10th Ed.
Fig. 7.6; MBB 11th Ed. Fig. 6.6; PB 4th Ed. Fig.
11.2; 5th Ed. Fig. 10.2)
-
curves
display first increasing and then diminishing marginal returns as level of
output increases
3. Cost in the Short-Run
-
distinguish
between fixed and variable costs associated with different inputs
-
Total
Cost (TC) = TFC + TVC (MBB
10th Ed.
Fig. 7.3; MBB 11th Ed. Fig. 6.3; PB 4th Ed. Fig.
11.4; 5th Ed. Fig. 10.4)
-
Average
Fixed Cost (AFC) = fixed cost per unit output
-
Average
Variable Cost (AVC) = variable cost per unit output
-
Average
Total Cost (ATC) = fixed (AFC) + variable (AVC) cost per
unit output
Note:
-
i
- (MBB
10th Ed.
Fig. 7.3; MBB 11th Ed. Fig. 6.3; PB 4th Ed. Fig. 11.4;
5th Ed. Fig. 10.4) narrowing of TC – TVC as level of output rises;
ii - (MBB
10th Ed.
Fig. 7.4; MBB 11th Ed. Fig. 6.4; PB 4th Ed. Fig. 11.5;
5th Ed. Fig. 10.5) MC curve cuts AC curve at lowest point
– as long as MC < AC, AC continues to fall, if MC > AC then AC rises, at
minimum of AC = MC
iii – (MBB
10th Ed.
Fig. 7.4; MBB 11th Ed. Fig. 6.4; PB 4th Ed. Fig. 11.5;
5th Ed. Fig. 10.5)‘U-shaped’ AC Curve reflects: spreading fixed costs
over larger output but eventual
diminishing marginal returns
4. Production and Cost in the Long-Run
-
LR a sequence
of SR scenarios, when series of SRs become LR is open question
-
over time market and technological
constraints relax, factor prices change, fixed inputs becomes variable,
tastes change, technology changes
-
if
technology improves Product Curve shifts up and
costs down per unit output (do more for less)
-
if factor prices change shift cost
curves; how depends on which cost; (MBB
10th Ed.
Fig. 7.4; MBB 11th Ed. Fig. 6.4; PB 4th Ed. Fig. 11.5;
5th Ed. Fig. 10.5) if fixed costs
increase TFC curve moves up shifting TC but leaving variable cost curves
unaffected – AVC & MC; if variable cost goes up, then fixed cost curve
remains constant but variable cost curves shift up as well as TC
-
LR AC (MBB
10th Ed.
Fig. 7.7; MBB 11th Ed. Fig. 6.7; PB 4th
Ed. Fig
11.8; 5th Ed. Fig. 11.8) is a sequence
of SR AC at different ‘scale of production’, i.e. increasing size of
capital plant and equipment, LR AC the envelop of SR curves (variations MBB
10th Ed.
Figs
7.8,
7.9a,
7.9b &
7.9c; MBB 11th Ed. Figs 6.8, 6.9a, b & c; PB not displayed)
-
when fixed input becomes variable,
i.e. capital, increases in capital (assuming homogenous function) will
exhibit eventual diminishing marginal returns
-
to degree increases in capital reflect increase in scale have familiar
pattern of initially increasing marginal returns, often a sector of constant
returns to scale, and eventual declining returns to scale
5. Supply Curve
-
firm supply
curve, (MBB
10th Ed.
Fig. 8.6; MBB 11th Ed. Fig. 7.6; PB 4th Ed. Fig.
12.5 ,
5th Ed. Fig. 11.5)
-
industry supply curve (MBB
10th & 11th Eds.
Fig. 3.5; PB 4th Ed.
Fig. 12.6; 5th Ed. Fig. 11.6)
-
where actually produce
depends on marginal revenue or MR; go out of business if VC not fully covered; stay in business
in SR if all VC covered
-
industry supply curve: horizontal
summation of individual firm MC above AC
Summary of Supply
In effect, Supply reduces to the
constrained maximization of output by the firm subject to the cost
constraint represented by two equations:
1. Q = g (K, L)
2. C = PKK + PLL
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