Micro and Macro Economics

Primarily, the following texts compares AVG, AFC, MC and ATC in the short run and long run. Then, it portrays the distinction of competition market and monopoly market. Next, it illustrates why profit maximization is crucial for the firm and how applied in life.

1.

The cost curves in the short run or in the long run are closely relevant with factors of production. The important factors of production are land, labor, capital and entrepreneur.

Average& Marginal Cost Curves

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Short-run production refers to production that can be completed given the fact that at least one factor of production is fixed. AFC, AVC and ATC constitute main expenditures in short-run.

The formula are shown below:

AFC=Total Fixed Cost/ Total Units of Output

AVC= total variable cost/ number of units produced

ATC= total/ total of units produced

The marginal cost curve goes through the minimum point of the average total cost curve and average variable cost curve. Each of these curves is U-shaped. The average fixed cost curve slopes down continuously. The average fixed cost curve starts out with a steep decline, then it becomes flatter and flatter. It portrays that as output increases, the same fixed cost can be spread out over a wider range of output.  Also, specialization would occur when workers are assigned specific tasks within a production process. Workers will require less training to be an efficient worker. Therefore this will lead to an increase in labor productivity and firms will be able to benefit from economies of scale and increased efficiency. However, the law of diminishing marginal productivity sets in as more and more of a variable input is added to a fixed input. Marginal and average productivities fall and marginal costs rise. And when average productivity of the variable input falls, average variable cost rise. The average total cost curve is the vertical summation of the average fixed cost curve and the average variable cost curve. If the firm increased output enormously, the average variable cost curve and the average total cost curve would almost meet.

[pic 2]

The long run production is a planning and implementation stage for producers. Long run costs are accumulated when firms change production levels over time in response to expected economic profits or losses. The long run production emphasizes the firm can vary the quantities though all inputs. A firm can adjust the number of all its inputs: land, labor and capital.

It is U shaped. In the long run, as output increase, the average cost will fall due to internal economies of scale. Economies of scale means the bigger the firm’s size and then the lower its costs of production. This firm first begins to grow, it becomes better at what it is producing, is able to get more output, and thus experiences lower and lower average total costs as it grows larger. For the firm above, the benefits of getting larger begin to diminish. This firm’s tenth factory is its minimum efficient scale: The level of total output this firm must achieve to minimize its long-run average total cost. Beyond this level of production, as this firm continues to grow, it will achieve constant returns to scale. Then, output increases further, average cost will remain constant and if the output is increased further, the average cost will increase again due to internal diseconomies of scale. When an organization becomes too big, it begins to experience inefficiencies. When a firm grows so large that it has factories in all corners of the world, a dozen levels of management, and countless opportunities for corruption and miscommunication, its efficiency decreases and its average total costs begin to increase.

2.

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In the competitive market, there are no barriers to entry into or exit out of the market. Firms produce homogeneous, identical, units of output that are not branded. More importantly, there is perfect knowledge, with no information failure or time lags in the flow of information. Knowledge is freely available to all participants, which means that risk-taking is minimal. Moreover, the price faced by each firm is determined by market supply and demand. Market forces determine the price. Since price equals average revenue, the firm's demand curve also represents the firm's average revenue at each level of output. Since the firm can sell as much as it wants at Pe, the marginal cost equals the price. Therefore: MR=D=AR=P.

 [pic 4]

Possible for firms in perfectly competitive market to make abnormal profits in the short run. This is where price is greater than AC.

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Normal profit is the profit just sufficient to keep a business in their current market in the long run. It is also the opportunity cost of capital. Profits act as an incentive for enterprise.

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Monopoly is a market with a single firm. It produces and sells a commodity that has no close substitutes. The firm is industry. It means that there is no competition. It has many barriers to entry. The firm is a price maker. It is free to fix its own price. AR curve or demand curve is downward sloping, the firm can sell more, but only at a lower price. MR lies below AR.