ECO 101 Basic Microeconomics Notes 2024 PDF

ECO 101 : BASIC MICROECONOMICS (NOTES) FINMGT 1101 │ FIRST SEM │ 2024 LESSON 5: The Production Function Solution: 28 − 20...

ECO 101 : BASIC MICROECONOMICS (NOTES) FINMGT 1101 │ FIRST SEM │ 2024 LESSON 5: The Production Function Solution: 28 − 20 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 10 − 15 The Production function and the 8 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = Production Theory 5 𝑴𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝟏. 𝟔 Production Function - the economic process of converting the inputs into outputs 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 - explains the manner by which a business firm decides how 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑤ℎ𝑒𝑛 𝑎𝑛 𝐸𝑥𝑡𝑟𝑎 much to produce each commodity (products/services) that = 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑈𝑛𝑖𝑡 𝑖𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 it sells - the firm determines how much of each king of labor, raw MC = ΔC/ΔQ materials, fixed capital good, etc., it will use (inputs or factors of production) Given, the cost of producing 2 units = PhP20. It implies, ΔC = PhP20 and ΔQ = 2. Solution: 20 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 = 2 𝑴𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝟏𝟎 Relationship between MR and MC If MR exceeds MC, then the producer will continue producing as it will add to his profits. - dictates how businesses decide the quantities of outputs to produce in response to demand Long-run Profit Maximation - concerned with productive activities of a business, namely: - process by which firms aim to achieve the highest 1. the decisions about methods of producing a given possible profit over an extended period, considering all quantity of the output in a plant of given size and costs and revenues while making strategic decisions about equipment and is concerned with short-run cost production and market positioning. minimization - this concept emphasizes that firms can adjust all inputs in 2. the determination of the most profitable quantities if the long run products to produce in any given plant and is after the - firms often invest in technology and innovation in the long short-run profit maximization run to reduce production costs and improve efficiency 3. the determination of the most profitable size and - long-run adjustments may include changing factors such equipment of plant and relates to long-run profit as labor, capital, and technology to respond to shifts in maximization demand or input prices. - firms that successfully maximize profits in the long run often Short-run Cost Minimization create sustainable competitive advantages that help them - choose quantities of the variable inputs so as to minimize maintain market share. total cost The Law of Diminishing Marginal Returns - under the constraint that the quantities of some factors are - called as law of diminishing returns, the principle of fixed (i.e. cannot be changed) diminishing marginal productivity, and the law of variable inputs are those inputs of production that a firm variable proportions can use as per its requirement and make changes in - states that after some optimal level of capacity is reached, it easily. For example, raw materials of production, labor, adding an additional factor of production will actually result capital, etc. in smaller increases in output Short-run Profit Maximization - this law affirms that the addition of a larger amount of one - occurs at the point where marginal revenue equals factor of production, ceteris paribus, inevitably yield marginal costs for as long as the competitive marketplace decreased per-unit incremental returns allows a positive profit, and before the perfect competition has reduced prices LAW OF DIMINISHING MARGINAL RETURNS Total Average Marginal marginal revenue is the net revenue a business earns Labor Product Product Product by selling an additional unit of its product. The 1 10 marginal revenue is the change in revenue divide by the 2 24 3 36 change in quantity. 4 44 5 48 Example: 6 48 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 7 47 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 9 43 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 Mr. A used to sell 10 pencils per day. Now he is selling 15. Earlier, his total revenue was PhP20. It is now PhP28. What is The Three Stages of Production. his MR? 1. The first stage is the increasing returns stage. 2. The second stage is the diminishing returns stage. 3. The third stage is the negative returns stage. 1 ECO 101 : BASIC MICROECONOMICS (NOTES) FINMGT 1101 │ FIRST SEM │ 2024 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 = 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑴𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 Examples: Problem1: Suppose that fixed costs are PhP300 and variable costs are PhP900. What is total cost? Total Cost = PhP300 + 1. Increasing returns stage. During this stage. The producer PhP900 = PhP1,200 experiences an increase in output as they add more units of input. Problem 2: Suppose that you produce 50 boxes of apples, and 2. Diminishing returns stage. During this stage, the you use the costs from Problem 1. What are average variable producer experiences a decrease in output as they add costs and average fixed costs? more units of input. Average Variable Cost = 900/50 = 18, and AFC = 300/50 = 6 3. Negative returns stage. During this stage, the producer experiences a further decrease in output as they add mor Problem 3: In the above example, what is average total cost? units of input. Average Total Cost = 1,200/50 = 24 Understanding these stages is essential for producers to Problem 4: If you increase your production by 5 boxes, and your optimize their production process. total cost increases by 60, what is your marginal cost? Marginal Cost = 60/5 = 12 The Seven Important Economic Costs LESSON 6: The Perfect Competition Total Variable Cost (TVC) - cost of all variable inputs - Examples: cost of temporary workers and hourly labor, the cost of materials, office supplies, energy, and taxes The Four Industry Types Total Fixed Cost (TFC) - cost of all fixed inputs - Examples: cost of the building, large pieces of machinery, certain fixed taxes (property tax), and salaried employees on long-term contracts. Total Cost (TC) - sum of TVC and TFC Average Variable Cost (AVC) - variable cost per product, or total variable cost divided by The concentration ratio compares the size of firms in relation output to their industry as a whole. Low concentration ratio indicates greater competition in an industry, compared to one with a Average Fixed Cost (AFC) ratio nearing 100%, which would be a monopoly. - fixed cost per product, or total fixed cost divided by output Pure Competition - a market structure in which there are many competing firms Average Total Cost (ATC) selling identical products or services. - cost per product, or total cost divided by output - very few, if any, industries in the real world are purely competitive, because it is believed that each company is Marginal Cost (MC) unique and has at least a very small amount of monopoly - per product cost of producing an additional unit of the power. product, or the change in total cost divided by the change Example:??? in output 1. Perfectly Competitive Market Relationships Between the Various Costs - is a hypothetical extreme because of the ff assumptions: there are a large number of buyers and sellers selling 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 homogeneous products. This indicates that all the products are perfect substitutes for each other. Products + 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 are “identical” (hardly recognizable from one another) 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 all the sellers sell the product at a uniform price. (sellers 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 = are price takers) 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 Conditions in a perfect competition: (1) many firms produce identical products; 2 ECO 101 : BASIC MICROECONOMICS (NOTES) FINMGT 1101 │ FIRST SEM │ 2024 (2) many buyers are available to buy the product, and many AN ACT TO PROHIBIT MONOPOLIES AND COMBINATIONS sellers are available to sell the product; IN RESTRAINT OF TRADE. (3) sellers and buyers have all the relevant information to ▪ The Philippine Competition Act (PCA) or R.A. 10667 is make rational decisions about the product that they are the primary competition law of the Philippines for buying and selling; and promoting fair competition in the marketplace and (4) firms can enter and leave the market without any protecting well-being of consumers in the process. The restrictions—in other words, there is free entry and exit PCA was passed in 2015 after languishing in Congress into and out of the market. for 24 years. - perfectly competitive firm is a price taker, because the 3. Monopolistic pressure of competing firms forces it to accept the - competition is a market structure in which there are many prevailing equilibrium price in the market. small firms selling slightly differentiated products or ▪ Raising the price of its product even by a small amount will services. make it lose all of its sales to competitors. - monopolistic competition is different from monopoly. ▪ Supply and demand in the entire market solely determine - Examples: Restaurants, toothpaste companies, soap the market price, not the individual farmer. makers, and milk producers - Firms are likely to be price takers if the market has some or all of the following 4. Oligopoly - a small number of firms is responsible for the majority of the Properties: sales 1. Huge number of firms - because firms in this industry are usually big, actions of one If there are enough sellers, no firm can raise or lower the firm (for example, a price cut or an aggressive advertising market price. campaign) significantly affect actions of rival firms. An individual firm is a tiny percent of the entire market. - sometimes oligopoly firms collude (work together) in order The firm’s demand curve is a horizontal line at the market to make larger profits. price. - Examples: Airline companies, Oil companies 2. Homogenous products In the eyes of the buyers products are identical. Thus, the buyers find no reason to prefer the product of Cartels one seller to the product of another. - a collection of independent businesses or organizations 3. Everybody knows everything that collude to manipulate the price of a product or service. 4. Low transaction costs - cartels are competitors in the same industry and seek to There is a large number of buyers and sellers and where reduce that competition by controlling pricing in agreement homogeneous product is sold at a uniform price. with one another. 5. Free entry and exit - tactics used by cartels include reduction of supply, price- There are no barriers to entry or exit in a perfect fixing, collusive bidding, and market carving. competition. - In the majority of regions, cartels are considered illegal and promoters of anti-competitive practices. - Obviously these conditions are never fully met, but many - The actions of cartels hurt consumers through increased markets are highly competitive. prices and lack of transparency. 2. Monopoly 1-2. Cite 2 differences between international and domestic - an industry with only one seller trade/business. - product that the firm sells has no close substitutes. 1. Nationality of Buyers and Sellers Monopolies can be firms that are granted exclusive 2. Nationality of other Stakeholders production rights by a government. 3. Mobility of Factor of Production Examples: Public utilities 4. Customer Heterogeneity Across Markets - The monopolist is a PRICE MAKER. 5. Difference in Business Systems and Practices - Monopolistic markets exist when one company is the 6. Political System dominant provider of a good or service. 7. Business Regulations and Policies - Limited competition and high barriers to entry enable the 8. Currency Used in Business Transactions monopoly in this market to set the price and supply of a good or service. 5-6. Benefits of IT to nations. - Monopolistic markets are controversial because they can 1. Earning of Foreign Exchange: lead to price-gouging and deteriorating quality due to a lack 2. More Efficient Use of Resources: of alternative choices. 3. Improving Growth Prospects and Employment Potentials: - Regulators may intervene to prevent monopolistic markets 4. Increased Standard of Living: from existing if they believe such a market is detrimental to the general public. 7-8. Benefits of IT to firms. - A natural monopoly is a type of monopoly that occurs in 1. Prospects for Higher Profits: International business gives an industry that has extremely high fixed costs of scope to firms a whole new market to target. distribution. 2. Increased Capacity Utilization: - Example. Suppliers of utilities. 3. Prospects for Growth: 4. Way Out to Intense Competition in Domestic Market How the Phil. Government regulate monopolists 5. Improved Business Visions: ▪ Republic Act No. 3247, December 01, 1925 9-10. Reasons for the conduct of stake holder analysis. 1.To enlist the help of key organizational players. 3 ECO 101 : BASIC MICROECONOMICS (NOTES) FINMGT 1101 │ FIRST SEM │ 2024 2.To gain early alignment among all stakeholders on goals and Law clerk’s salary +35,000 plans. PhP 85,000 (Total EC) 3.To help address conflicts or issues early on. Step 2. Subtracting the explicit costs from the revenue gives you the accounting profit. LESSON 7: Theory of Cost and Profit Revenues 200,000 Explicit costs – 85,000 Accounting profit Php115,000 (Accntng profit/IC) Monopsony and Oligopsony Monopsony These calculations consider only the explicit costs. To open his - a market situation in which there is only one buyer own practice, Fred would have to quit his current job, where he is earning an annual salary of $125,000. This would be an Oligopsony implicit cost of opening his own firm. (Opportunity cost = cost - a state of the market in which only a small number of foregone) buyer exists for a product Economic Profit = Total Revenues – Explicit Costs – Implicit Example: McDonalds, Burger King, and Wendy’s buys a huge Costs amount of the meat produced by American ranchers. That gives the industry the ability to dictate the price they are willing Economic Profit = 200,000 – 85,000 – 125,000 = to pay. -$10,000/yr Theory of Cost and Profit All firms, regardless of size or complexity, tries to earn a profit: Profit = Total Revenue – Total Cost Total Revenue = Price/Unit x Quantity Sold Total Cost = Variable Cost + Fixed Cost A firm’s revenue depends on the demand for the firm’s product. Two Types of Cost Explicit Cost - out-of-pocket costs, or payments that are actually made by the firm - Example: wages, rent Implicit Cost - the opportunity cost of using resources already owned by the firm - Example: working in the business while not getting a formal salary, or using the ground floor of a home as a retail store - also include the depreciation of goods, materials, and equipment that are necessary for a company to operate Two Concept of Profit Accounting Profit - cash concept - total revenue minus explicit costs - the difference between money brought in and money paid out Economic Profit - total revenue minus total cost - including both explicit and implicit costs. - determines the success/failure of the firm Example Problem: Fred currently works for a corporate law firm where he earns PhP125,000/year. He is considering opening his own legal practice, where he expects to earn PhP200,000 per year once he gets established. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for PhP50,000 per year. A clerk could be hired for PhP35,000 per year. If these figures are accurate, would Fred’s legal practice be profitable? Step 1. First you have to calculate the costs. You can take what you know about explicit costs and total them: Office rental 50,000 4