topic 3 industry analysis and costs of production(2) (1)
TRANSCRIPT
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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?
+MIT ,ni-ersity .ietna'/3002"01Prices And Markets 2
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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&
+MIT ,ni-ersity .ietna'/3002"01Prices And Markets 9
https://www.youtube.com/watch?v=IqvoxkBAlEwhttps://www.youtube.com/watch?v=IqvoxkBAlEw
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P/O-CTIO, A,- COSTS
Part
+MIT ,ni-ersity .ietna'/3002"01Prices And Markets 10
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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
+MIT ,ni-ersity Prices And Markets 14
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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
+MIT ,ni-ersity Prices And Markets 1
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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$R
• 5e >uy a ne& >i))er kitc(enR
Labour, ovens, kitchen, and machine
are all variable inputs…
after 4 years of business.
+MIT ,ni-ersity Prices And Markets 1
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;(ortrun Production %on)run Production
•Sh"rt&run pr"ducti"n: is the pr"ducti"n in s"meperi"d "$ 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?
+MIT ,ni-ersity Prices And Markets 12
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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$%
•
+MIT ,ni-ersity Prices And Markets "0
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T(e po&er rule
I! ) = x n
t(en
+MIT ,ni-ersity Prices And Markets "1
mechanics of the power rule*
n drops do&n: t(en inde= looses 1
) x n
=
)i-in)
To !ind 'a= or 'ini'u' set dyd= K o
d
d
y
x nx
n
=−1
d
d
y
xnx
n
=−1
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Po&er rule: E=a'ples
+MIT ,ni-ersity Prices And Markets ""
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TP APL = MPL
+MIT ,ni-ersity Prices And Markets "3
Am"unt "$La3"ur 5L7
Am"unt "$Capital 5B7
T"tal Output57
0 " 0
1 " 10
" " 30
3 " F0
4 " 20
" 9
F " 102
" 11"
2 " 11"9 " 102
10 " 100
A4eragePr"duct
&
18
1D
28
28
19
16
1E
1'12
18
MarginalPr"duct
&
18
28
!8
28
1D
1!
'
8&'
&6
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0 " 4 F 2 10 1"
TP
La3"r per m"nth
Output per m"nth
+MIT ,ni-ersity Prices And Markets "4
0 " 4 F 2 10 1"
AP = MP
La3"r per m"nth
Outputper 1"rerper m"nth
28 AP
MP
H'a=
MP K 0
;
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+elations a'on) TP$ 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
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%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
+MIT ,ni-ersity Prices And Markets "2
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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 $uncti"n
+MIT ,ni-ersity Prices And Markets "9
2C measures ho% much it %ill cost to expand
output ') one unit.
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A-era)e Total Cost$ 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
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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
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+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
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T(e s(apes o! MC MP%
+MIT ,ni-ersity Prices And Markets 33
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
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+elation >et&een MC A.C
• 5(en MC A.C$ A.C decreases
• 5(en MC S A.C$ A.C increases
+MIT ,ni-ersity Prices And Markets 34
1 " 3 4 F 2 9 10 110
"
0
100
MC
AC
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ABC decreases &(en output increases
+MIT ,ni-ersity Prices And Markets 3
+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
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+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'
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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
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+MIT ,ni-ersity Prices And Markets 32
;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?
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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?
+MIT ,ni-ersity Prices And Markets 39
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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