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Background to Supply
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Background to Supply The Short-run Theory of Production
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SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP = TPP/ Q V Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP = TPP/ Q V
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Wheat production per year from a particular farm (tonnes)
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SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP = TPP/ Q V –graphical relationship between TPP, APP and MPP Profits and the aims of the firm Long-run and short-run production: –fixed and variable factors The law of diminishing returns The short-run production function: –total physical product (TPP) –average physical product (APP) APP = TPP/Q V –marginal physical product (MPP) MPP = TPP/ Q V –graphical relationship between TPP, APP and MPP
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Number of farm workers Wheat production per year from a particular farm Tonnes of wheat produced per year Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 40
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Number of farm workers Wheat production per year from a particular farm Tonnes of wheat produced per year Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 40
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Wheat production per year from a particular farm Number of farm workers Tonnes of wheat produced per year TPP b Diminishing returns set in here d Maximum output
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Wheat production per year from a particular farm Number of farm workers (L) Tonnes of wheat per year TPP Tonnes of wheat per year Number of farm workers (L) TPP = 7 L = 1 MPP = TPP / L = 7
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Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year MPP Number of farm workers (L) Number of farm workers (L)
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Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP APP = TPP / L Number of farm workers (L) Number of farm workers (L)
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b b Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP Diminishing returns set in here Number of farm workers (L) Number of farm workers (L)
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Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP b d d Number of farm workers (L) Number of farm workers (L) Maximum output b
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c c Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP b b d d Number of farm workers (L) Number of farm workers (L) Slope = TPP / L = APP
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Background to Supply Short-run Costs
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SHORT-RUN COSTS Measuring costs of production: opportunity costs –explicit costs –implicit costs Fixed costs and variable costs Total costs –total fixed cost (TFC) –total variable cost (TVC) –total cost (TC = TFC + TVC) Measuring costs of production: opportunity costs –explicit costs –implicit costs Fixed costs and variable costs Total costs –total fixed cost (TFC) –total variable cost (TVC) –total cost (TC = TFC + TVC)
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Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 Total costs for firm X
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TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 Total costs for firm X
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TFC Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91
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TVC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TFC Total costs for firm X
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TVC TFC Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103
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TC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TVC TFC Total costs for firm X
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TC TVC TFC Total costs for firm X Diminishing marginal returns set in here
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Marginal cost –marginal cost (MC) and the law of diminishing returns Marginal cost –marginal cost (MC) and the law of diminishing returns SHORT-RUN COSTS
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Average and marginal physical product Output Quantity of the variable factor MPP b Diminishing returns set in here
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Output Quantity of the variable factor MPP b c APP Average and marginal physical product
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Output (Q) Costs (£) MC x Diminishing marginal returns set in here Marginal cost
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–marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves SHORT-RUN COSTS
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TC TVC TFC Total costs for firm X Bottom of the MC curve
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Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost SHORT-RUN COSTS
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Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) SHORT-RUN COSTS
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Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) SHORT-RUN COSTS
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Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) SHORT-RUN COSTS
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Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) –relationship between AC and MC Marginal cost –marginal cost (MC) and the law of diminishing returns –the relationship between the marginal and total cost curves Average cost –average fixed cost (AFC) –average variable cost (AVC) –average (total) cost (AC) –relationship between AC and MC SHORT-RUN COSTS
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Output (Q) Costs (£) AFC AVC MC x AC z y Average and marginal costs
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Background to Supply The Long-run Theory of Production
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LONG-RUN THEORY OF PRODUCTION All factors variable in long run The scale of production: –constant returns to scale –increasing returns to scale –decreasing returns to scale All factors variable in long run The scale of production: –constant returns to scale –increasing returns to scale –decreasing returns to scale
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Short-run and long-run increases in output
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Economies of scale –specialisation & division of labour –indivisibilities –container principle –greater efficiency of large machines –by-products –multi-stage production –organisational & administrative economies –financial economies –economies of scope Economies of scale –specialisation & division of labour –indivisibilities –container principle –greater efficiency of large machines –by-products –multi-stage production –organisational & administrative economies –financial economies –economies of scope LONG-RUN THEORY OF PRODUCTION
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Diseconomies of scale External economies and diseconomies of scale Optimum combination of factors MPP a /P a = MPP b /P b... = MPP n /P n Diseconomies of scale External economies and diseconomies of scale Optimum combination of factors MPP a /P a = MPP b /P b... = MPP n /P n LONG-RUN THEORY OF PRODUCTION
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Background to Supply Isoquant–Isocost Analysis
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape Isoquants –their shape
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Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e Units of labour (L) Units of capital (K) An isoquant
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Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e a Units of labour (L) Units of capital (K) An isoquant
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Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e a b Units of labour (L) Units of capital (K) An isoquant
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Units of K 40 20 10 6 4 Units of L 5 12 20 30 50 Point on diagram a b c d e a b c d e Units of labour (L) Units of capital (K) An isoquant
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution Isoquants –their shape –diminishing marginal rate of substitution
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Units of capital (K) Units of labour (L) g h K = 2 L = 1 isoquant MRS = 2 MRS = K / L Diminishing marginal rate of factor substitution
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Units of capital (K) Units of labour (L) g h j k K = 2 L = 1 K = 1 L = 1 isoquant MRS = 2 MRS = 1 MRS = K / L Diminishing marginal rate of factor substitution
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –an isoquant map Isoquants –their shape –diminishing marginal rate of substitution –an isoquant map
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I1I1 I2I2 I3I3 I4I4 I5I5 Units of capital (K) Units of labour (L) An isoquant map
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale
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I1I1 I2I2 I3I3 I4I4 I5I5 Units of capital (K) Units of labour (L) An isoquant map
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns
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Units of capital (K) Units of labour (L) g h j k K = 2 L = 1 K = 1 L = 1 isoquant MRS = 2 MRS = 1 MRS = K / L Diminishing marginal rate of factor substitution
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost
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Units of labour (L) Units of capital (K) Assumptions P K = £20 000 W = £10 000 TC = £300 000 An isocost
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Units of labour (L) Units of capital (K) TC = £300 000 a b c d Assumptions P K = £20 000 W = £10 000 TC = £300 000 An isocost
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ISOQUANT- ISOCOST ANALYSIS Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost –shifts in the isocost Isoquants –their shape –diminishing marginal rate of substitution –isoquants and returns to scale –isoquants and marginal returns Isocosts –slope and position of the isocost –shifts in the isocost
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Least-cost combination of factors for a given output –point of tangency Least-cost combination of factors for a given output –point of tangency ISOQUANT- ISOCOST ANALYSIS
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Units of labour (L) Units of capital (K) Assumptions P K = £20 000 W = £10 000 TC = £200 000 TC = £300 000 TC = £400 000 TC = £500 000 Finding the least-cost method of production
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Units of labour (L) Units of capital (K) TPP 1 TC = £400 000 TC = £500 000 r s t Finding the least-cost method of production
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Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach ISOQUANT- ISOCOST ANALYSIS
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Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach Highest output for a given cost of production Least-cost combination of factors for a given output –point of tangency –comparison with marginal productivity approach Highest output for a given cost of production ISOQUANT- ISOCOST ANALYSIS
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TPP 2 TPP 3 TPP 4 TPP 5 Units of capital (K) Units of labour (L) O TPP 1 Finding the maximum output for a given total cost
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O Isocost Units of capital (K) Units of labour (L) TPP 2 TPP 3 TPP 4 TPP 5 TPP 1 Finding the maximum output for a given total cost
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O s u Units of capital (K) Units of labour (L) TPP 2 TPP 3 TPP 4 TPP 5 r v TPP 1 Finding the maximum output for a given total cost
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O K1K1 L1L1 Units of capital (K) Units of labour (L) TPP 2 TPP 3 TPP 4 TPP 5 r v s u TPP 1 t Finding the maximum output for a given total cost
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Background to Supply Long-run Costs
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run average costs –shape of the LRAC curve –assumptions behind the curve
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Alternative long-run average cost curves Output O Costs LRAC Economies of Scale
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Output O Costs LRAC Alternative long-run average cost curves Diseconomies of Scale
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Output O Costs LRAC Alternative long-run average cost curves Constant costs
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A typical long-run average cost curve Output O Costs LRAC
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A typical long-run average cost curve Output O Costs LRAC Economies of scale Constant costs Diseconomies of scale
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs
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Long-run average and marginal costs Output O Costs LRAC LRMC Economies of Scale
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Output O Costs LRAC Long-run average and marginal costs LRMC Diseconomies of Scale
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Output O Costs LRAC Long-run average and marginal costs = LRMC Constant costs
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Output O Costs Long-run average and marginal costs LRMC LRAC Initial economies of scale, then diseconomies of scale
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve
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Deriving long-run average cost curves: factories of fixed size SRAC 3 Costs Output O SRAC 4 SRAC 5 5 factories 4 factories 3 factories 2 factories 1 factory SRAC 1 SRAC 2
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SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 LRAC Costs Output O Deriving long-run average cost curves: factories of fixed size
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Deriving a long-run average cost curve: choice of factory size Costs Output O Examples of short-run average cost curves
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LRAC Costs Output O Deriving a long-run average cost curve: choice of factory size
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence
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LONG-RUN COSTS Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence –minimum efficient plant size Long-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs –the envelope curve Long-run cost curves in practice –the evidence –minimum efficient plant size
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Derivation of long-run costs from an isoquant map –derivation of long-run costs Derivation of long-run costs from an isoquant map –derivation of long-run costs LONG-RUN COSTS
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Units of capital (K) O Units of labour (L) TC 1 100 TC 2 200 At an output of 200 LRAC = TC 2 / 200 Deriving an LRAC curve from an isoquant map
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Units of capital (K) O Units of labour (L) TC 1 TC 2 TC 3 TC 4 TC 5 TC 6 TC 7 100 200 300 400 500 600 700 Note: increasing returns to scale up to 400 units; decreasing returns to scale above 400 units Deriving an LRAC curve from an isoquant map
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Derivation of long-run costs from an isoquant map –derivation of long-run costs –the expansion path Derivation of long-run costs from an isoquant map –derivation of long-run costs –the expansion path LONG-RUN COSTS
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Units of capital (K) O Units of labour (L) TC 1 TC 2 TC 3 TC 4 TC 5 TC 6 TC 7 100 200 300 400 500 600 700 Expansion path Deriving an LRAC curve from an isoquant map
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Background to Supply Revenue
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REVENUE Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR) Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR)
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O O Price (£) AR, MR (£) Q (millions)Q (hundreds) PePe S D (a) The market(b) The firm Deriving a firm’s AR and MR: price-taking firm
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O O Price (£) AR, MR (£) PePe S D D = AR = MR Q (millions)Q (hundreds) (a) The market(b) The firm Deriving a firm’s AR and MR: price-taking firm
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REVENUE Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) Defining total, average and marginal revenue Revenue curves when firms are price takers (horizontal demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR)
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Total revenue for a price-taking firm TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555
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TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555 TR (£) 0 1000 2000 3000 4000 5000 6000 Total revenue for a price-taking firm
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TR TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555 TR (£) 0 1000 2000 3000 4000 5000 6000 Total revenue for a price-taking firm
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TR TR (£) Quantity Total revenue for a price-taking firm
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Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) REVENUE
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Revenues for a firm facing a downward-sloping demand curve
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AR and MR curves for a firm facing a downward-sloping D curve Q (units) 12345671234567 P =AR (£) 87654328765432 AR AR, MR (£) Quantity
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Q (units) 12345671234567 P =AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 MR (£) 6 4 2 0 -2 -4 MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve AR
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Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) REVENUE
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TR curve for a firm facing a downward-sloping D curve Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14
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TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14
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Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand REVENUE
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TR curve for a firm facing a downward-sloping D curve TR Elasticity = -1 Elastic Inelastic Quantity TR (£)
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Elasticity = -1 Elastic Inelastic AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve MR AR
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Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand Shifts in revenue curves Revenue curves when price varies with output (downward-sloping demand curve) –average revenue (AR) –marginal revenue (MR) –total revenue (TR) –revenue curves and price elasticity of demand Shifts in revenue curves REVENUE
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Background to Supply Profit Maximisation
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PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC Using total curves –maximising difference between TR and TC
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TR, TC, T (£) Quantity Finding maximum profit using total curves
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TR, TC, T (£) TR Quantity Finding maximum profit using total curves
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TR, TC, T (£) TR TC Quantity Finding maximum profit using total curves
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PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using total curves –maximising difference between TR and TC –the total profit curve
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TR, TC, T (£) TT TR TC Quantity Finding maximum profit using total curves
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TR, TC, T (£) TT TR TC a b c d Quantity Finding maximum profit using total curves
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TR, TC, T (£) TT TR TC d e f Quantity Finding maximum profit using total curves
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PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves
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PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC
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Quantity Costs and revenue (£) Finding the profit-maximising output using marginal curves
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Quantity Costs and revenue (£) MC Finding the profit-maximising output using marginal curves
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Quantity Costs and revenue (£) e MR MC Profit-maximising output Finding the profit-maximising output using marginal curves
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PROFIT MAXIMISATION Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC –stage 2: using AR and AC curves to measure maximum profit Using total curves –maximising difference between TR and TC –the total profit curve Using marginal and average curves –stage 1: profit maximised where MR = MC –stage 2: using AR and AC curves to measure maximum profit
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Quantity Costs and revenue (£) Measuring the maximum profit using average curves MR MC
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Quantity Costs and revenue (£) MR MC AR Measuring the maximum profit using average curves
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6.00 4.50 T O T A L P R O F I T MR Quantity Costs and revenue (£) MC AC AR b a Total profit = £1.50 x 3 = £4.50 Measuring the maximum profit using average curves
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Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC PROFIT MAXIMISATION
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LOSS O Costs and revenue (£) Quantity MC AC AR MR Q AC AR Loss-minimising output
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Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC PROFIT MAXIMISATION
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The short-run shut-down point O Costs and revenue (£) Quantity AR AVC AC P = AVC Q
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Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC –long-run shut-down point: P = LRAC Some qualifications –long-run profit maximisation –the meaning of profit What if a loss is made? –loss minimising: still produce where MR = MC –short-run shut-down point: P = AVC –long-run shut-down point: P = LRAC PROFIT MAXIMISATION
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