S4 CH5

A. Fixed factor& Variable factor

 fixed factor = factor of production qty unchanged when output change
 variable factor = factor of production qty change when output change

B. Production period: Short run& Long run

 short run = period have fixed& variable factor
 long run = period only variable ; no fixed factor
 Remark: SR / LR 唔係睇 time duration ; 係睇有冇 fixed factor

C. Input-Output relation in short run

 TP (total product) = total output produced in a time period

 AP (average product) =
 output qty produced per unit of variable factor
TP
 AP = 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑞𝑞𝑞𝑞𝑞𝑞

 MP(marginal product) = change in TP when variable factor changed 1 unit

MP of n unit of variable factor = n unit TP − (n − 1)unit TP
nd nd st
e.g 2 MP = 2 TP – 1 TP

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D. LDMR (law of diminishing marginal return)
 LDMR states that in short run, when variable factor add to fixed factor continuously, holding
other factor constant, marginal product will finally diminish

 LDMR is
 empirical 經驗 law generalized from observation
 assume state of tech. & production factor quality unchanged

st
 1 worker added → not use all fixed factor
∴ more worker added → fixed factor fully utilized + MP ↑

more worker added → too much variable relative to fixed factor

∴ efficiency ↓ → MP ↓
Remark: 考試 LQ 要畫埋個 MP 表

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E. Cost-Output relationship in SR
 fixed cost:
TFC (total fixed cost) = total cost using all fixed factor
→ unchanged when output change

 variable cost:
TVC (total variable cost) = total cost using all variable factor
→ change when output change

 TC (total cost) = TFC + TVC

𝑇𝑇𝑇𝑇
 AC = 𝑇𝑇𝑇𝑇

 MC(marginal cost) = change in TC when output changed 1 unit

MC of n unit of output = n unit TC − (n − 1)unit TC
nd nd st
e.g 2 MC = 2 TC – 1 TC

Remark: MC curve pass through AC minimum pt from below

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F. Production in LR
 long run = period only variable ; no fixed factor

 firm enlarge scale of production if ↑ production factor → ↑ output

 firm enlarge scale of production → AC ↓

∵ benefit of economies of scale

but scale of production further ↑ →AC ↑

∵ different problem
∴ diseconomies of scale

Remark: optimum production scale = output at lowest LR AC

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G. Internal economies of scale
 internal economies of scale = benefit enjoyed by firm when firm ↑ scale of production

1) technical economies of scale:

 fully utilize input → machine use efficiently → AC ↓

2) marketing economies of scale:

 purchase ↑ raw material → ↑ discount → AC ↓
 spread promotion cost over large output → AC ↓

3) managerial economies of scale:

 combine department → save human resource → AC ↓
 specialization scope ↑ → employ professional → ↑ efficiency → AC ↓

4) financial economies of scale:

 ∵ provide adequate collateral → ↓ interest rate → AC ↓
 easy get bank credit → AC ↓

5) risk bearing economies:

 large company more fund → easy diversify product& market& raw material
→ ↓ business risk

6) research& development:
 large firm afford large expense on research& development
→ develop new production technique → AC ↓

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H. Internal diseconomies of scale
 internal diseconomies of scale = disadv. arise when firm scale too large

1) marketing diseconomies:
 firm expand → market saturated → further sale promote not effective → AC ↑

2) managerial diseconomies:
firm expand → organizational structure complicated
 → delay decision + weak coordination → wrong decision↑
 → management efficiency ↓ → AC ↑

3) financial diseconomies:
 too much fund → bank lend $ risk ↑ → charge ↑ interest rate → AC ↑

I. External economies of scale

 occur when firm face low AC ∵ whole industry grow in size

 all firm in industry enjoy benefit when (either 1)

 firm #. ↑
 gather in same location

 reason
1) govt. provide better transport network& infrastructure → firm in that area AC ↓
supplier deliver goods to different firm same time → transport AC ↓

2) gather same place → promote cost ↓

∵ localization ↓ shopper info. cost where buy + ↓ time& effort compare goods

3) university& college offer ↑ career courses → firm benefit from ↑ skilled worker to recruit

4) firm cooperate& share production equipment / resource / technology → AC ↓

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J. External diseconomies of scale
 occur when firm face high AC when industry grow in size

 reason
1) ↑ firm compete given labor amount → labor become scarce
→ firm offer ↑ wage attract high quality labor → AC ↑

2) industry excessively develop → land& capital become scarce → rental cost ↑ → AC ↑

3) firm gather same place → road congested → transport cost ↑

K. Firm objectives
1) profit maximization:
 Profit = TR − TC
 firm basic objective → maximize profit when making production decision

2) market sale maximization:

firm
 integrate other firm
 cut P

→ ↑ market share

3) corporate social responsibility:

∵ firm reputation affect product sale volume
∴ firm do sth not aim profit in short run → bear social responsibilities

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L. Condition of profit maximization
 simplify analysis → firm operate at competitive market → firm = P taker

 competitive market:
 no single buyer / seller can control market P
 buyer + seller act on given P

 MR(marginal revenue) = change in TR(total revenue) when output changed 1 unit

MR of n unit of output = n unit R − (n − 1)unit TR
nd nd st
e.g 2 MR = 2 TR – 1 TR

 Marginal Profit = MR − MC

 Profit maximizing firm produce output level at MR = MC

Remark: given that P not < AC ∵ firm suffer loss

M. Firm supply schedule

 if firm is P taker → profit maximize when MC = MR
 ∵ MC schedule show firm output at different market P ∴ it regard as supply schedule