Kinh tế học - Chapter 4: How businesses work

Chapter 4How Businesses WorkMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Learning ObjectivesExplain and apply the economic perspective on business operations.Define and apply the production function, average product, and marginal product.Discuss the implications of the cost function, average cost and marginal cost. Explain the difference between variable costs and fixed costs.Define and apply the revenue function and marginal revenue.Determine the profit-maximizing level of output.4-2The Nature of BusinessThe outputs of a business are the goods and services that it sells to customers.The inputs are the goods and services that the business uses to produce the outputs. Production is the process of turning inputs into outputs.4-3The Flow of MoneyA business collects and spends money.Revenue is the money that customers pay for the output of a business. Cost is the money that the business pays for its inputs.The difference between revenue and cost is profits.4-4How a Business OperatesBuyersFlow of goods and servicesFlow of moneyBusinessInputsOutputsCost ofinputsRevenue from selling outputsProductionSuppliers oflabor and other inputsProfit maximization4-5Profit MaximizationThe main objective of business is to maximize profits.Businesses operate to create the largest difference between revenues and cost.It is difficult to consistently produce high profits.Profits vary significantly among different businesses and firms.4-6Inputs Used in ProductionBusinesses use 5 main inputs in producing outputs:Labor refers to the hours of work supplied by the various types of workers. Capital is all the long-lived physical equipment, software, and structures a business uses in its production process. Businesses can either own or rent the capital it uses.4-7Inputs Used in ProductionThe third input is land.Some industries are very land-intensive, such as agriculture and mining.Intermediate inputs refer to any goods and services purchased from other businesses for immediate use in the production process. For example:All businesses need to buy electricity.Auto manufacturers need to buy steel.4-8Inputs Used in ProductionThe final input, business know-how, is all the knowledge and technology necessary for the production process. Sometimes the knowledge is embodied in the equipment the companies buy.For many companies, business know-how is the reason for their success.The success of Google depends on its search algorithm and its method of pricing.4-9Production Function with One Input: LaborProduction function is the mathematical link between inputs and outputs.The table to the left shows the production function for a lawn mowing business.64534221Number of Lawns Mowed Using a Hand MowerHours of Labor004-10Graph of Production Function with One Input: Labor4-11Two Inputs: Capital and Labor With the capital input, the same number of labor hours results in more lawns mowed.1164953642321Number of Lawns Mowed with a Power MowerNumber of Lawns Mowed Using a Hand MowerHours of Labor0004-12Two Inputs: Capital and Labor4-13Marginal Product of LaborThe production function determines how much a business can produce, given its inputs.It also determines how much extra output the business will create by:Adding more workers.Having employees work more hours.4-14Marginal Product of LaborThe marginal product of labor (or simply marginal product) is the extra amount of output the firm can generate by adding one more hour of labor or one more worker. Marginal concepts are important since many economic decisions are made on the basis of incremental steps.4-15Example of Marginal ProductInput: Number of AccountantsOutput: Number of Tax Returns Done in a WeekMarginal Product of Labor: Additional Tax Returns per Worker1101022010329943785447 The following table shows the production function for an accounting firm.4-16Diminishing Marginal ProductAs shown in the table on the previous slide, marginal product falls as the number of workers goes up. Thus, each additional worker (accountant) has a diminishing marginal product. This occurs because there isn’t enough room for all the accountants in the office or they must share a single copy machine or computer.4-17Average ProductThe average product is another piece of information obtained from the production function.Average product is the output divided by the number of labor hours or by the number of workers - in other words, output per hour or output per worker. 4-18Cost of InputsEvery input used in the production process has a cost.Labor cost is the price of labor (wages and benefits) multiplied by the number of hours worked.Cost of capital and land depends on whether a business owns or rents the inputs.If owned, there is an opportunity cost.If rented, the cost is simply the price of the rental.4-19Cost of InputsThe cost of intermediate inputs is the money that a business pays for goods and services purchased from other companies.Any outlays that increase a company’s knowledge and capabilities are part of the cost of accumulating business know-how. This includes:Conducting research into new technologies.Hiring engineers and designers to develop new products.Conducting marketing studies. 4-20Total Cost of ProductionTotal cost is the sum of the cost of each of the inputs.Total cost is determined by the following: Total Cost = (Cost of labor) + (Cost of capital and land) + (Cost of intermediate inputs) + (Cost of accumulating business know-how)4-21Cost FunctionThe cost function measures the cost of producing each level of output.The cost function for a candy manufacturer is shown in the adjacent table.The left column gives the possible levels of output and the right column gives their associated cost.Candy Produced (Pieces)Total cost (Dollars) 0 $5001,000 $1,5002,000 $2,5003,000 $3,6004,000 $4,8505,000 $6,3506,000 $8,1007,000$10,1004-22Graph of Candy Cost Function4-23Marginal CostThe concept of marginal cost is key to profit maximization.The marginal cost, or MC, is the added expense of producing one more unit of output given by the following: Marginal Cost = (Added cost of producing additional units of output) ÷ (Number of additional units of output)4-24Calculating Marginal CostCandy Produced (Pieces)Total Cost (Dollars)Marginal Cost (Dollars) 0 $500 $01,000 $1,500$1.002,000 $2,500$1.003,000 $3,600$1.104,000 $4,850$1.255,000 $6,350$1.506,000 $8,100$1.757,000$10,100$2.004-25Graph of Marginal Cost4-26Variable versus Fixed CostsBusinesses have two types of cost:Variable costs, also known as short-term costs, are those that managers can quickly raise or lower by means of decisions they make today. Fixed or long-term costs are harder to change - or more precisely, a decision by a business to change its fixed costs will take longer to have an effect. 4-27Revenue and Marginal RevenueRevenue is the amount of money companies get from selling their products or services. If a company sells only one product at a fixed price, then revenue is calculated by:Multiplying the number of units sold by the price per unit.The marginal revenue is the additional money that the business gets from producing and selling one more unit of output. 4-28Profit MaximizingProfits depend on the difference between revenue and cost.Both revenue and cost are affected by the level of production.The business should produce at an output level that maximizes profits.This level can be found by using the profit-maximizing rule.4-29Profit-Maximizing RuleThe business will maximize profits at the output level where: marginal revenue = marginal costsThis means that a profit-maximizing business will increase production as long as marginal revenue exceeds marginal costs.It makes sense to increase production in this case, since it will earn a profit for the firm.4-30Example of Profit MaximizationCandy (Pieces)Total Cost (Dollars)Marginal Cost (Dollars)Revenue, Assuming Each Piece of Candy Sells for $1.50 (Dollars)Marginal Revenue (Dollars)Profits (Dollars) 0 $500- 0- -$5001,000 $1,500$1.00 $1,500$1.50 $02,000 $2,500$1.00 $3,000$1.50 $5003,000 $3,600$1.10 $4,500$1.50 $9004,000 $4,850$1.25 $6,000$1.50$1,1505,000 $6,350$1.50 $7,500$1.50$1,1506,000 $8,100$1.75 $9,000$1.50 $9007,000$10,100$2.00$10,500$1.50 $4004-31Example of Profit MaximizationThe table on the previous slide demonstrates the profit-maximization rule.Expansion continues until the firm produces 5,000 pieces of candy. At this point, profits are maximized and marginal revenue equals marginal cost.After this point, marginal cost rises to $1.75, which is above the marginal revenue of $1.50. The business has a loss on this incremental increase in production (from 5,000 units to 6,000), and overall profits decline.4-32The Law of Supply RevisitedThe law of supply states that the quantity supplied in a market rises as prices increase.This follows from the profit-maximization rule.Businesses can increase profits by expanding production when the market price of the goods or services increases.4-33Short-Term versus Long-TermShort-term profit maximization focuses on achieving the highest profit, assuming unchanged fixed costs.Long-term profit maximization assumes a business can vary all its inputs.Boeing versus Airbus is a good example of a long-term decision.4-34