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Production
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Process of transforming a set of resourcing into a good/service with economic value
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Input
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resources use in production
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Output
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quantity of good/service the results from production
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Productive Efficiency
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making a given quantity of out at the lowest cost
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Explicit costs (AKA Accounting Costs)
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payments made by a business to business or people outside it
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Implicit Costs
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Owner's opportunity costs of being involved with a business
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Normal Profit
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minimum returns necessary for owners to keep funds and skills in their business (what did they give up?/opportunity cost)
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Total Product
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Overall quantity (q) of output produced with a given workforce.
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Labor Intensive process
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employs labour > capital
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Capital Intensive process
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employees labour < capital
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Explicit costs
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(like accounting costs)
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Fixed Inputs
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same every output level/quantity
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Variable Inputs
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inputs that are different at every output level
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Marginal product
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extra total product with an additional worker
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Marginal Cost
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extra cost of producing an extra unit of output
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Owner's Wage
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how much they could have made working elsewhere
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Normal Profit
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how much you could've made if you invested the money elsewhere
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Primary sector
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extract/cultivate natural resources
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Secondary sector
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fabricate or process goods
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Tertiary/Service sector
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trade and information industries
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Economic Costs
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Explicit + Implicit costs
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Economic Profit
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TR - EC
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Average Product (output per worker)
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total product / # of workers
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Total cost
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fixed costs + variable costs
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Economic Product/profit
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TR - explicit - implicit
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Marginal Cost
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ᐃ total cost /ᐃ total product
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Average fixed cost
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fixed costs / Q
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Average variable cost
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variable costs / Q
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Average cost
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Average fixed cost + average variable cost
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Increasing returns to scale
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the % change in output > the % change in inputs
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Constant returns to scale
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the % change in output = the % change in inputs
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decreasing returns to scale (diseconomies of scale)
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the % change in output<the % change inputs
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Long Run Average Cost
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= Min Short Run average cost at every output
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Accounting Profit
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= TR - explicit costs (always > economic profit)
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Total Revenue (TR)
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P*Q
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Average Revenue (AR)
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TR/Q
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Marginal Revenue
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ᐃTR/ᐃQ
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Profit Maximizing Point
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when marginal revenue=marginal cost (MR=MC)
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Types of production
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primary, secondary, tertiary sector
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Types of Production Processes
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Capital Intensive
Labour Intensive
Labour Intensive
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Short Run Fixed Inputs (e.g. Capital)
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quantities cannot be adjusted in the short run
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Short Run Variable Inputs (e.g. labour)
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quantities can be adjusted in the short run
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Average product
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quantity of output produce per worker
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Law of Diminishing Marginal Returns
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In short-run production addition of more variable input causes MP and MP to fall after some point
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If average value rises
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marginal value must be above it
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If average value falls
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marginal value must be below it
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If average value stays constant
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the marginal value must equal it
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MC Curve is shaped
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like a "J" because of the law of diminishing marginal returns
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LR average cost curve is shaped
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like a saucer because of various ranges of returns to scale
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Market Structures
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1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly
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Perfect Competition
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Many buyers and sellers, a standard product (identical), easy entry and exit e.g. Agriculture
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Monopolistic Competition
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Many buyers and sellers, slightly different products (lends itself to production differentiation), easy entry and exit e.g. restaurants + fast food chains
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Oligopoly
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4 or fewer control > 50% of the market share, Standard or similar products, protected by entry barriers
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Examples of Oligopolies
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Coke, pepsi, cola/soda/pop
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Monopoly
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A single (almost always government regulated) business, product with no close substitutes, protected by entry barriers
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Examples of a monopoly
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Hydro, Water, Transportation
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Entry Barriers for Oligopolies & Monopolies
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Increasing returns to scale
Market experience
Restricted ownership of resources (e.g. computer chips)
Legal obstacles → patents (e.g. pharmaceutical)
Market abuses → predatory pricing (illegal)
Advertising → (e.g. Disney+, Coke)
Market experience
Restricted ownership of resources (e.g. computer chips)
Legal obstacles → patents (e.g. pharmaceutical)
Market abuses → predatory pricing (illegal)
Advertising → (e.g. Disney+, Coke)
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Market Power
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is a business's ability to affect the price it charges → comes from ability to control supply
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Example of Market Power
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drug cartels/suppliers
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A perfect competitor has a demand curve
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that is horizontal at the prevailing market price (it doesn't choose)
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A perfect competitor's average revenue
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is constant so that marginal revenue = average revenue = price (because price doesn't change)
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Perfect competitor short run supply curve
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MC curve above shutdown point (min AVC)
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Perfect Competitors in the Long Run
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Always break even as firms enter/exit the market
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Minimum-cost pricing
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price = minimum avg cost (Perfectly competitive long-run equilibrium)
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Marginal-cost pricing
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price = marginal cost (Perfectly competitive long-run equilibrium)
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Output increased if
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MR > MC → good: rev>cost
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Output decreased if
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MC > MR → good: rev<cost
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Break-even point for perfect competitor
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P=Min Avg Cost
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Shut Down Point
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lowest price at which a business will choose to operate in the short run
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Perfect competitor shutdown point
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P=Min Avg Variable Cost
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Karl Marx's Theory of exploitation
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Product's price is based on the amount of labour that goes into producing. Capitalists cut costs by minimizing worker's wages and by maximizing the length of the workday, then keep any surplus value (excess of their revenues/costs)
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A monopolist's demand curve
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the same as for the entire market → downward sloping
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Monopolistic competitor's demand curve is elastic
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because of some control over price
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Oligopolists demand curve
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kinked
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oligopolist's demand curve is kinked because
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A business raising price finds rivals keeps it constant (so demand is flat) and a business reducing price finds rivals raise theirs as well (so demand is steep).
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Ways oligopolies co-operate
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Price leadership → Biggest company sets price
Collusion → illegal (plotting against consumer)
Cartel → group of producers who work together to restrict supply (illegal in USA and Canada, OPEC is in Saudi)
Collusion → illegal (plotting against consumer)
Cartel → group of producers who work together to restrict supply (illegal in USA and Canada, OPEC is in Saudi)
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Revenue Conditions for a Monopolist
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marginal revenue is below its demand curve because demand (=average revenue) falls as quantity increases
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monopolist maximizes profit at
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the quantity where marginal revenue = marginal cost.
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A monopolist charges
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a higher price and a lower quantity than would occur if the market were perfectly competitive. → do not have to be efficient
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Regulators (governments) of monopolies usually adopt average-cost pricing to
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make regulated monopolies break even.
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In a monopolistic competitor price is found using
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the business's demand curve.
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Short run a monopolistic competitor may make a profit/loss at
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its profit-maximizing point.
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Criminal offences under the Competition Act, include
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Conspiracy , Bid-rigging , Predatory Pricing , Abuse of Dominant Position
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Nonprice competition is used by
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monopolistic competitors and oligopolists
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Examples of non-price competition
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product differentiation advertising
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Industrial concentration
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market domination by a few large businesses.
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Industrial concentration can
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provide the consumer with benefits due to increasing returns to scale, impose costs on the consumer due to market power, may encourage technical innovation
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The Organization of Petroleum Exporting Countries
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is an example of a cartel that has had some success in the past in affecting oil prices.
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