ECONOMICS Johnson Hsu July 2014

Economics of work and leisure Nature of work and leisure and trends in employment and earnings Market Structures and competitive behavior in leisure markets Labour demand, supply and wage determination Market failure and the role of the government and union in the labour market

Short-run costs of production Short-run: the time period when at least one factor of production, usually capital, is in fixed supply.

Fixed costs Costs that do not change in the short run with change in output

Variable costs Costs that change with change in output

Labour cost are fixed or variable ? Ans: Depends.

Total cost (TC) It is made up of fixed and variable costs in the short run. As output rises, total cost increase.

Average cost (AC) Also often called unit cost, it total cost divided by output.

Average fixed cost (AFC) Total fixed cost divided by output

Average variable cost (AVC) Total variable cost divided by output

Marginal cost (MC) The change in total cost resulting from changing output by one unit

Relationship between MC and AC

Costs of production Output TC MC TFC TVC AC AFC AVC 100 1 180 80 2 250 70 150 125 50 75 3 300 200 33.33 66.67 4 360 60 260 90 25 65 5 440 340 88 20 68 6 540 16.67 73.33

The relationship between TC, TVC and TFC

Long-run costs The period of time when it is possible to alter all factors of production

Relationship between the SRAC and the LRAC curves If a firm is producing in the most efficient way possible in the long run, but they then want to expand, they will have to expand along a short run average cost curve as they will be limited by their fixed factors. However, in the long run they can get more of the fixed factors and so will move back down to the long run average cost curve. This is why the LRAC is made up of a series of SRAC curves.

Minimum efficient scale The lowest level of output at which full advantage can be taken of economies of scale

Economy scale A reduction in long-run average costs resulting from an increase in the scale of production

Economies of Scale

Diseconomy of scale An increase in long-run average costs caused by an increase in the scale of production

Diseconomies of scale

Economies of scale

Constant returns of scale long-run average cost remaining unchanged when the scale of production increase

Internal economies scale Economies of scale that occur within the firm as a result of its growth

A cinema operator may achieve a number of benefits from growing in size Purchasing economies of scale. Selling economies. Technical economies of scale. Managerial economies of scale. Financial economies of scale. Risk-bearing economies.

External economies of scale Saving in costs available to firms arising from the growth of the industry as a whole. Development of good reputation and improved infrastructure for producing a good quality product.

Internal diseconomies of scale Difficult to run a large firm, keeping a check on everything that is happening and co-ordinating production

Internal diseconomies of scale Diseconomies of scale experience by a firm caused by its growth

External diseconomies of scale Diseconomies of scale resulting from the growth of the industry, affecting firms within the industry

because the demand is inelastic. Firms sell goods and services in return for revenue. The total payment a firm received is not surprisingly called total revenue. While total cost expected to rise with output, total revenue may not always move in the same direction as sales. Why? Ans: because the demand is inelastic.

Average revenue (AR) Total revenue divided by the output sold

Marginal revenue (MR) The change in total revenue resulting from the sale of one more unit

Relationship between AR and MR Unit sold AR TR MR 1 10 2 20 3 30 4 40 5 50 6 60 7 70

Relationship between AR and MR

Perfect competition A market structure with many buyers and sellers, free entry and exit and an identical product

Price taker A firm that has no influence on price

Price maker A firm that influence price when it changes its output

Average, total and marginal revenue of a firm with market power Unit sold AR TR MR PED 1 20 Elastic 2 18 36 16 3 48 12 4 14 56 8 5 60 6 10 Unit elastic 7 -4 inelastic

Unit elasticity of demand When a given percentage change in price cause an equal percentage change in demand, leaving total revenue unchanged

Predatory pricing Setting price low with the aim of forcing rival out of the market

Superior good A good with positive income elasticity of demand greater than one

Market structure Monopoly Oligopoly Monopolistic competition Pure competition

How to decide the market structure firm operate? The market concentration ratio Whether there are barrier to entry and exit The type of profits earned in the long run The behavior and performance of firms

Barrier to entry Obstacles to new firms entering a market

Five main barriers to entry By law High start-up costs Brand names Economies of scale Limit pricing

Limit pricing Setting a price low to discourage the entry of new firms into the market

Barriers to exit Obstacles to firm leaving a market

Three main barriers to exit Sunk costs Advertising expenditure contracts

Contract Use 2013

Monopoly Profits are maximised where marginal revenue equals marginal cost

Profit maximisation Achieving the highest possible profit where marginal cost equals marginal revenue

Supernormal profit Profit earned where average revenue exceeds average cost

Normal profit The level of profit needed to keep a firm in the market in the long run

Where does the profit maximising firm operate at?

Bringing them all together for the impact on firms

Natural monopoly A market where long-run average costs are lowest when output is produced by one firm

Legal monopoly A market where a firm has a share of 25 per cent or more

Dominant monopoly A market where a firm has a 40 per cent or more share

Monopoly:

Monopoly Efficiency:

Monopoly & Economic Efficiency

Oligopoly A market structure dominated by a few large firms

Oligopoly: Price Rigidity

Kinked demand curve A demand curve made up of two parts: it suggests oligopolists follow each others’ price reductions, but not price rises

Cartel A group of firms that produce separately but sell at one agreed price

Game theory A theory of how decision makers are influenced by the actions and reactions of others

Monopolistic competition A market structure in which where there is a large number of small firms selling product

Monopolistic Competition:

A Spectrum Markets:

Incumbent firms Firms already in the market

Perfect Competition:

What efficiencies exist?

How could this happen in the short run for the firm?

How would this impact the industry and therefore

Long Run: Long Run:

Short Run:

Dynamic efficiency Efficiency in terms of developing and introducing new production techniques and new products

X inefficiency The difference between actual costs and attainable costs

Contestable market A market in which there are no barriers to entry and exit and the costs facing incumbent and new firms are equal

Hit-and-run competition Firms quickly entering a market when there are supernormal profits and leaving it when the profits disappear

Travel & Tourism: Importance to the UK economy & contestable market

Ans: What will be the impact of the regulation introduced into the football market? Premier League agrees new financial regulations BT and Sky clash over televising football's Premier League

Regulation-What are the different types of regulation the Government can introduce into a market? 

What is the objectives of firms? Ans: Profit maximisation

What is the objective of the manager? Ans: Sales revenue maximisation.

Why the objective of the manager is different from the firm? Ans: Because managers’ salaries are more often linked to the growth of sales than to profit performance. High and expanding sales can also help to attract external finance and may result in greater economies of scale. To maximise sales revenue, a firm would continue to produce more as long as extra output would increase revenue.

Sales revenue maximisation The objective of achieving as high a total revenue possible

Growth maximisation The objective of increasing the size of the firm as much as possible

Utility maximisation The aim of trying to achieve as much satisfaction as possible

Profit satisficing Aiming for a satisfactory level of profit rather than the highest level of profit possible

stakeholders People affected by the activities of a firm

Major employment regulations introduced since 1997