BUSS1040: ECONOMICS FOR BUSINESS DECISION MAKING

BUSS1040: ECONOMICS FOR BUSINESS DECISION MAKING

BUSS1040 ECONOMICS FOR BUSINESS DECISION MAKING WEEK 1: KEY CONCEPTS AND COMPARATIVE ADVANTAGE CHAPTER 1: KEY ECONOMIC CONCEPTS Ecnmics is cncerned with distributin f finite resurces t satisfy infinite needs + wants f sciety SCARCITY AND OPPORTUNITY COST 1. Scarcity: resurces are limited, s that nt all wants can be met 2. Opprtunity cst: what we give up when we make a particular decisin à the value f the next best fregne alternative à mney, resurces, time etc. Explicit csts: csts that invlve direct payment Implicit csts: pprtunities fregne that d nt invlve explicit csts Sunk csts: unrecverable csts E.g. firm spent $100 millin n advertising last year = cannt get mney r effrt back by the campaign MARGINAL ANALYSIS Marginal = added r extra Marginal benefit (MB): benefit f an extra unit cnsumed by an individual Marginal cst (MC): additinal cst f buying ne mre unit à typically the price f the gd Marginal allws us t examine the behaviur f individuals in the market!" >!$ = better ff t d that activity!" <!$ = wrse ff t d that activity CETERIS PARIBUS Ceteris paribus: all ther things equal B/c real wrld is cmplicated, it is necessary t simplify situatins t better analyse them CORRELATION AND CAUSATION Crrelatin: when 2+ factrs are bserved t be mving tgether r in ppsite directins Causatin: a change in ne variable brings abut a change in anther variable Requires ecnmic thery, framewrk etc. t distinguish b/w crrelatin + causatin CHAPTER 4: TRADE AND THE PPF GAINS FROM SPECIALISATION Prductin pssibility frntier (PPF): graphs the utput an individual/cuntry can prduce with a particular set f resurces à resurce scarcity = trade-ffs in what is prduced A cuntry s PPF shws all cmbinatins f G+S a cuntry can prduce given its resurces and current state f technlgy Slpe = pprtunity cst f prducing an additinal unit f a gd in terms f anther (cncave) Opprtunity cst f prducing ne gd is increasing the level f utput f anther gd Shifts in the PPF: Shift n bth axes: ecnmic grwth, technlgical change à bsts prductin f bth gds Shift n ne axis: shck bsts/limits prductin f X nly

GAINS FROM EXCHANGE/TRADE Trade helps allcate G+S t thse wh value them mst à b/c n party will cnsent t a transactin that makes them wrse ff Paret imprving: bth agents are better ff E.g. A wns bike he values at $10, B wants a bike and willing t pay $100 à A sells bike t B fr $40 A better ff b/c gt $40 fr bike he valued at $10 B better ff b/c bught $100 valued bike fr $40 KEY: exchange is vluntary Trade allws peple t take advantage f specialisatin gains = reduced verall csts f prductin + increasing utput à related t cmparative advantage in prductin E.g. R can nly wash clthes + M can nly ck à trade = each cnsume new G When each can perfrm bth, BUT ne at high cst, specialising can lwer csts making bth better ff End Result: bth parties can cnsume utside their PPF ABSOLUTE AND COMPARATIVE ADVANTAGE: Cmparative advantage: Ability f an ecnmic agent t prduce a G/S at a lwer pprtunity cst than ther prducers NOTE: it is impssible t have cmp advantage in bth gds in questin Abslute advantage: Ability f an ecnmic agent t prduce mre f a G/S than cmpetitrs using the same amunt f resurces Opprtunity Cst Of 1: Meals (in terms f baskets fregne) Baskets (in terms f meals fregne) R 1/2 2 M 1/6 6 Prducer with lwer pprtunity cst has a cmparative advantage in that gd R in laundry M in cking Differences in pprtunity csts f prductin create gains frm specialisatin Each persn specialises in the gd in which they have the cmparative advantage RESULT: increased ttal prductin, efficient use f resurces + time

WEEK 2: PRODUCTION, COSTS AND SUPPLY CHAPTER 7: PRODUCTION AND COSTS ECONOMIC PROFIT VERSUS ACCOUNTING PROFIT We assume firms aim t maximise prfits Ecnmic prfit: revenues ttal pprtunity cst Ttal revenue (TR): amunt a firm receives fr sale f its utput Ttal cst (TC): amunt a firm pays t buy inputs f prductin + fregne pprtunities Prfit: ttal revenue ttal csts ' = )* )$ Zer ecnmic prfit: revenues nly cver pp. csts E.g. B pens a restaurant, giving up a jb as a lecturer that pays $20 000 per year. He invests $50 000 f his savings in the restaurant and the current rate f interest is 10% p.a.. In year 1, the restaurant has revenue $200 000, rental csts $50 000 and fd csts $20 000. What is B s ecnmic prfit in his Y1? TR = $200 000 TC = explicit (rental $50 000 + fd $20 000) + implicit (salary $20 000 + interest [$50 000 x 0.1] = $95 000 Prfit = $200 000 - $95 000 = $105 000 Accunting prfit: revenues all explicit csts THE SHORT RUN AND LONG RUN Shrt run: perid f time during which at least ne f the FOP is fixed Lng run: all FOP are variable Defined in relatin t hw lng it takes fr all inputs t becme variable à will differ b/w industries PRODUCTION A firm cnverts inputs (labur, capital, land etc.) int final utput (G+S) sld in the marketplace Prductin functin: shws relatinship b/w quantity f inputs used and maximum quantity f utput prduced, given the state f technlgy GRAPH: Marginal prduct (MP) - change in utput when ne mre input is used Slpe f prductin functin Diminishing MP: MP becmes prgressively smaller à each additinal wrker cntributes less t utput than the wrker befre = capacity Shrt run cncept b/c relies n ne input being fixed Lng run prductin = all inputs are variable We are interested in hw quantity f utput changes when we change quantity f all FOP Prductin functin in LR:, = -(/0) Returns t scale: hw the quantity f an utput changes when there is a prprtinal change in the quantity f all inputs Output increases by same prprtinal change = cnstant returns t scale Output increases by mre than prprtinal increase in all inputs = increasing returns t scale Output increases by less than prprtinal increase in all inputs = decreasing returns t scale Nte: it is pssible that a firm has diminishing MP in shrt run, and has increasing returns t scale in lng run

SHORT RUN COSTS Cst functin: links quantity f utput with its assciated prductin cst )$ = -(,) GRAPH: Shrt run cst curve Output = 0, TC > 0 à fixed csts TC curve rises as utput increases Csts increase when mre inputs are required TC curve rises at an increasing rate Diminishing MP ^^ Fixed csts (FC): csts that dn t vary with utput :$ = )$ ;h=>, = 0 à i.e. when utput = 0, all csts are fixed Variable csts (VC): csts that vary with utput Ttal csts (TC): )$ =?$ + :$ Marginal cst (MC): increase in TC that arises frm an extra unit f prductin à A =!$!$ = B)$ BC MC decrease at high utputs due t gains frm specialisatin GRAPH: intersects minimum f AVC and ATC Average csts (AC): csts per unit Average fixed cst (AFC): fixed cst per unit f utput à D:$ = EF G GRAPH: Dwnward slping à fixed numeratr, denminatr increases with utput Average variable cst (AVC): variable cst per unit f utput à D?$ = HF G GRAPH: Diminishing MP = AVC curve will eventually be upward slping Average ttal cst (ATC): ttal cst per unit f utput à D)$ = IF G D)$ = D:$ + D?$ GRAPH: Creates U-shape = initially decreasing, eventually increasing with utput Relatinship between ATC, AVC and MC MC curve intersects minimum f ATC and AVC If MC > ATC, ATC rises If MC < ATC, ATC is falling As utput increases, AFC gets smaller As utput increases, difference b/w ATC and AVC decrease In the shrt run, a firm chses: Mst efficient prductin methd given its fixed inputs Cheapest cmbinatin f all inputs (fixed and variable) LONG RUN COSTS In the lng run, all inputs are variable If a firm desn t prduce, csts = 0 GRAPH: Lng run average cst (LRAC): shws lwest cst at which a firm can prduce a given quantity f utput in lng run with NO fixed inputs Derived frm shrt term ATC curves Cmbinatin f cheapest shrt run average cst curves Cst f prductin where a firm uses ecnmically efficient quantities f labur + capital Ecnmies f scale: when LR average csts decrease with utput Disecnmies f scale: when LR average csts increase with utput Cnstant returns t scale: when LR average csts are cnstant as utput expands