KINH TẾ VI MÔ Chapter 5 for student BBA

CHAPTER 5THEORY ON FIRM’S BEHAVIOR Content *Theory on production - Production and Production function - Short run &Long run - Economies and diseconomies of scale *Theory on cost - Total,

CHAPTER 5

THEORY ON FIRM’S BEHAVIOR

Content

*Theory on production

- Production and Production function

- Short run &Long run

- Economies and diseconomies of scale

*Theory on cost

- Total, average and marginal cost

- Economic, Accounting and Sunk cost

*Theory on profit

- Profit

- Total, average and marginal revenue

+ Short run: is a period of time in which the quantity of at least

one input is fixed (fixed input) and the quantities of the other

inputs can be varied (variable inputs)

+ Long run: is a period of time in which the quantity of all inputs

can be varied

* No specific time that can be marked on the calendar

to separate the short run from the long run

I Theory on production

2 Production function

- The maximum quantity of outputs gained from

certain quantity of inputs at current technology

constraint in a certain time period

3 Economies and diseconomies of scale

*Increasing returns to scale (Economies of scale):

1% increase in inputs → more than 1% increase in outputs

or f(hX) > hf(X)

*Constant returns to scale:

1% increase in inputs → 1% increase in outputs

or f(hX) = hf(X)

*Decreasing returns to scale (Diseconomies of scale):

1% increase in inputs → less than 1% increase in outputs

or f(hX) < hf(X)

I Theory on production

3 Economies and diseconomies of scale

In term of Cobb-Douglas production function:

α + β> 1: Increasing returns to scale

α + β= 1: Constant returns to scale:

α + β< 1: Decreasing returns to scale

I Theory on production

3 Economies and

diseconomies of scale

According to Cobb& Douglas:

US economy’s production function

- Average Product (AP) of an input: equals to total

product divided by the quantity of the input

employed

- Average Product of labour (APL)

- Average Product of capital (APK)

4 Production in short-run

- Marginal Product (MP) of a input is the increase in total

product divided by the increase in the quantity of the input

employed, holding the quantity of all other inputs constant

- Marginal Product of labour (MPL)

- Marginal Product of capital (MPK)

I Theory on production

4 Production in short-run

- The law of diminishing marginal returns: occurs

when the marginal product of an additional input

(e.g worker) is less than the marginal product of

previous input (i.e previous worker)

* What is the relationship between MP and AP?

5 Production in long-run

Iso-quantity curve:

shows the various

combinations of input

quantities that lead to the

same level of output

Q 1

Q 2

More quantity A

B C

Capital (K)

Labour (L)

I Theory on production

5 Production in long-run

Iso-quantity curve’s characteristics

- Downward sloping, the closer to the right hand-side, the more

quantity produced

- Never intersect

− ∆ K.MPPK- ∆ L MPPL= 0

- → MPPL/ MPPK= ∆ K / ∆ L

- → MPPL/ MPPK: the slope of Iso-quantity curve = The marginal

rate of technical substitution (MRTS)

L

I Theory on production

5 Production in long-run

*Special iso-quantity curve

Perfect substitute inputs

vs

MRTS = const

K

5 Production in long-run

*Special iso-quantity curve

Perfect Complement inputs

K

L

I Theory on production

5 Production in long-run

- Iso-cost: shows the various combinations of inputs that producer

can get from the available cost (i.e amount of money)

TC= r.K + w.L

→ K= TC/r – (w/r).L

→ w/r : the slope of total cost

Area C: can not afford

I Theory on production

6 Production optimzation

Q 3 A

B

C

D K

b. With available cost TC = 72.000$, what is

maximum quantity that can be produced?

1 Cost in short-run

1.1 Fixed cost, variable cost, total cost

- Fixed cost (FC): the cost of a fixed input, independent with

the output level

1.1 Fixed cost, variable cost, total cost

- Variable cost (VC): the cost of a variable input, varies with

the output level

II Theory on cost

1 Cost in short-run

1.1 Fixed cost, variable cost,

total cost

-Total cost (TC): is the sum of

total fixed cost and total

- Avarage fixed cost (AFC):

is total fixed cost per unit of

output

C

Q FC AFC =

1 Cost in short-run

1.2 Average cost

- Avarage variable cost

(AVC): is total variable cost

per unit of output

- Note: Average curves

(except AFC) is are

U-shaped

Q

VC AVC =

-Total average cost (ATC): is

total cost per unit of output

C

AVC AFC

Q

TC

ATC= = +

II Theory on cost

1 Cost in short-run

1.3 Marginal cost (MC): is

the change in total cost

results from a unit

increase in output

MC intersects AVC and ATC at

their minimum points

C

Q

) (

' Q

TC Q

-Long-run total cost (LTC):

is the total cost for

production when both

capital and labour can be

varied

C

2 Cost in long-run

- Long-run average total cost (LATC): is long-run

total cost per unit of output

Q

LTC LATC =

II Theory on cost

2 Cost in long-run

Decreasing returns to scale

Increasing returns to scale

II Theory on cost

- Long-run marginal cost (LMC): is the change in

long-run total cost results from a unit increase in

output

- LMC intersect LTC at its minimum points

) (

'Q

LTC Q

Decreasing returns to scale

Increasing returns to scale

II Theory on cost

3 Economic cost, Accounting cost and Sunk cost

- Economic cost: Total amount paid for inputs used in

II Theory on cost

3 Economic cost, Accounting cost and Sunk cost

- Accounting cost: Amount paid for inputs used in

production and reported in accounting notes

- Sunk cost: Amount paid for inputs used in

production which neither be refundable nor

changeable by future decisions/ actions

II Theory on profit

)(

=Π

1 Definition

- Average revenue: is total revenue per unit of output

- Marginal revenue: is the change in total revenue

results from a unit increase in output

Q

TR

AR =

) ( 'Q

TR Q

⇔

0 ' '( )− ( )=

MC MR

Π

II Theory on profit

3 Revenue maximization

0 '( )=

a. State out optimal Q,P, Π and TR to prove that

profit maximization and revenue maximization are

quite different

b. Firm A’s strategy is to earn as much revenue as

possible provided that profit always equal to 10$

State out optimal Q,P and TR

Q

P =12 −0.4

546

TC