Subject EconomicsAssignment No. 01Discipline M.B.A. (Executive)Term Submitte! B" S#miull#$ %$#nEx#min#tion &oll No. 0'(Q.1: Write a brief note of factors of production?)#ctors o* pro!uction #re t$e resources t$#t #re use! to pro!uce goo!s #n! services+1. Natural resources:T$e t$ings cre#te! b" #cts o* n#ture suc$ #s l#n!, -#ter, miner#l, oil #n! g#s !eposits, rene-#ble#n! nonrene-#ble resources.2. Labor:T$e $um#n e**ort, p$"sic#l #n! ment#l, use! b" -or.ers in t$e pro!uction o* goo!s #n! services.3. Physical capital.All t$em#c$ines, buil!ings, e/uipment, ro#!s#n!ot$er objects m#!eb"$um#nbeingstopro!uce goo!s #n! services.4. Huan capital:T$e .no-le!ge #n! s.ills #c/uire! b" # -or.er t$roug$ e!uc#tion #n! experience.!. "ntrepreneurship:T$e e**ort to coor!in#te t$e pro!uction #n! s#le o* goo!s #n! services. Entrepreneurs t#.e ris.#n! commit time #n! mone" to # business -it$out #n" gu#r#ntee o* pro*it.#H" P$%&'(#)%N P%**)+)L)#)"* ,$%N#)"$ -PP,.T$e 00) curve s$o-s t$e possible combin#tions o* goo!s #n! services #v#il#ble to #n econom",given t$#t #ll pro!uctive resources #re *ull" #n! e**icientl" emplo"e!.1$ent$eeconom"is#t pointi, resources#renot *ull"emplo"e!#n!2ort$e"#renot use!e**icientl". 0oint g is !esir#ble bec#use it "iel!s more o* bot$ goo!s, but not #tt#in#ble given t$e#mount o* resources #v#il#ble. 0ointd is one o* t$e possible combin#tions o* goo!s pro!uce!-$en resources #re *ull" #n! e**icientl" emplo"e!.*(/$()#0 /N& #H" PP,To incre#se t$e #mount o* *#rm goo!s b" 10 tons, -e must s#cri*ice 100 tons o* *#ctor" goo!s.T$e 00) curve is bo-e! out bec#use resources #re not per*ectl" #!#pt#ble to t$e pro!uction o*t$e t-o goo!s. As -e incre#se t$e pro!uction o* one goo!, -e s#cri*ice progressivel" more o* t$eot$er.*H),#)N1 #H" PP, ('$2"To incre#se t$e pro!uction o* one goo! -it$out !ecre#sing t$e pro!uction o* t$e ot$er, t$e 00)curvemust s$i*t out-#r!. T$e00)curves$i*ts out-#r!#s #result o* #nincre#seint$eeconom"3s resources 4& # tec$nologic#l innov#tion t$#t incre#ses t$e output obt#ine! *rom #given #mount o* resources. )rom point d, #n #!!ition#l 500 tons o* *#ctor" goo!s or 50 tons o**#rm goo!s #re no- possible (or #n" combin#tion in bet-een).Q.2: Write "conoics in its historical bac34round?Economics is t$esciencet$#t !e#ls -it$t$epro!uction, #lloc#tion, #n!useo* goo!s #n!services. t is import#nt to stu!" $o- resources c#n best be !istribute! to meet t$e nee!s o* t$egre#test numbero*people.As-e#remoreconnecte!glob#ll"toone#not$er,t$estu!"o*economicsbecomesextremel"import#nt. 1$ilet$ere#rem#n"sub!ivisionsint$estu!"o*economics, t-o m#jor ones #re m#croeconomics #n! microeconomics. M#croeconomics is t$estu!" o* t$e entire s"stem o* economics. Microeconomics is t$e stu!" o* $o- t$e s"stems #**ectone business or p#rts o* t$e economic s"stem. History of EconomicsT$e *irst -ritings on t$e subject o* economics occurre! in e#rl" 6ree. times #s 0l#to, in T$e&epublic, #n! Aristotle -rote on t$e topic. 7#ter suc$ &om#ns #s 8icero #n! 9irgil #lso -rote#bout economics.n me!iev#l times t$e s"stem o* *eu!#lism !omin#te!. 1it$ *eu!#lism, t$ere -#s # strict cl#sss"stem consisting o* nobles, clerg" #n! t$e pe#s#nts. n t$e s"stem, t$e .ing o-ne! #lmost #ll t$el#n! #n! un!er $im -ere # series o* nobles t$#t $#! l#n! $ol!ings o* v#rious si:es. 4n t$esel#n!$ol!ings -ereseries o* m#nors. T$ese-ere#.intol#rge*#rmingtr#cts in-$ic$t$epe#s#nts or ser*s -or.e! t$e l#n! in exc$#nge *or protection b" t$e nobles. 7#ter t$e s"stem o* merc#ntilism pre!omin#te!. t -#s #n economic s"stem o* t$e m#jor tr#!ingn#tions!uring t$e1(t$,1;t$,#n!1*#ire=t$in.ingo*t$eeig$teent$centur" !ue to t$e -ritings o* T$om#s M#lt$us. ?e *elt t$#t popul#tion -oul! #l-#"s #!v#nce*#ster t$#n t$e science #n! tec$nolog" nee!e! to support suc$ popul#tion gro-t$. D#vi! &ic#r!ol#ter st#te! t$#t -#ges ten! to settle #t # poor or subsistence level *or most -or.ers. @o$n Stu#rtMill provi!e! t$e b#c.!rop *or soci#lism -it$ $is t$eories t$#t supporte! *#rm cooper#tives #n!l#bor unions, less competition. T$ese t$eories -ere broug$t to # $ig$ point b" %#rl M#rx -$o#tt#c.e! t$e c#pit#listic, =l#isse:>*#ire= t$eories o* competition #n! inste#! *#vore! soci#lisms,m#r.e! more government control #n! st#te r#t$er t$#n priv#te o-ners$ip o* propert".Anot$er import#nt i!e# #t t$is time -#s t$e c$#nge in $o- items #re v#lue!. 1$ile *ormerl" #nitemAs v#lue st#"e! t$e s#me #ccor!ing to -$#t t$e item -#s, no- t$e -ort$ o* #n item -#s!etermine! b" $o- m#n" people -#nte! t$e item #n! $o- gre#t t$e suppl" o* t$e item -#s. T$is-#s t$e beginning o* t$e l#-s o* suppl" #n! !em#n!.n t$e *irst $#l* o* t$e t-entiet$ centur", @o$n M#"n#r! %e"nes -rote #bout business c"cles >-$en t$e econom" is !oing -ell #n! -$en it is in # slump. ?is t$eories le! to governmentssee.ing to put more controls on t$e econom" to prevent -i!e s-ings. A*ter 1orl! 1#r , emp$#sis -#s pl#ce! on t$e #n#l"sis o* economic gro-t$ #n! !evelopmentusing more sop$istic#te! tec$nologic#l tools.n recent "e#rs, economic t$eor" $#s been bro#!l" sep#r#te! into t-o m#jor *iel!s+m#croeconomics, -$ic$ stu!ies entire economic s"stemsB #n! microeconomics, -$ic$ observest$e -or.ings o* t$e m#r.et on #n in!ivi!u#l or group -it$in #n economic s"stem. n t$e l#tert-entiet$ centur" suc$ i!e#s #s suppl" si!e economics -$ic$ st#tes t$#t # $e#lt$" econonom" isver" necess#r" *or t$e $e#lt$ o* t$e n#tion #n! Milton )rie!m#nAs i!e#s t$#t t$e mone" suppl" ist$e most import#nt in*luence on t$e econom" -ere *#vore!.n t$e t-ent">*irst centur", t$e r#pi! c$#nges #n! gro-t$ in tec$nolog" $#ve sp#-ne! t$e term=n*orm#tion Age= in -$ic$ .no-le!ge #n! in*orm#tion $#ve become import#nt commo!ities.Q.3: +riefly e5plain the Price "lasticity of &eand?T$e 0rice El#sticit" o* Dem#n! (commonl" .no-n #s just price el#sticit") me#sures t$e r#te o*response o* /u#ntit" !em#n!e! !ue to # price c$#nge. T$e *ormul# *or t$e 0rice El#sticit" o*Dem#n! (0EoD) is+0EoD C (D 8$#nge in Eu#ntit" Dem#n!e!)2(D 8$#nge in 0rice)(alculatin4 the Price "lasticity of &eandFoum#"be#s.e!t$e/uestion=6ivent$e*ollo-ing!#t#, c#lcul#tet$epriceel#sticit"o*!em#n! -$en t$e price c$#nges *rom GH.00 to G10.00= Ising t$e c$#rt on t$e bottom o* t$ep#ge, All -#l. "ou t$roug$ #ns-ering t$is /uestion. )irst -eAll nee! to *in! t$e !#t# -e nee!. 1e .no- t$#t t$e origin#l price is GH #n! t$e ne- priceis G10, so-e$#ve0rice(47D)CGH#n!0rice(NE1)CG10. )romt$ec$#rt -eseet$#t t$e/u#ntit" !em#n!e! -$en t$e price is GH is 1'0 #n! -$en t$e price is G10 is 110. Since -eAregoing *romGH to G10, -e $#ve EDem#n!(47D)C1'0 #n! EDem#n!(NE1)C110, -$ere=EDem#n!= is s$ort *or =Eu#ntit" Dem#n!e!=. So -e $#ve+0rice(47D)CH0rice(NE1)C10EDem#n!(47D)C1'0EDem#n!(NE1)C110To c#lcul#te t$e price el#sticit", -e nee! to .no- -$#t t$e percent#ge c$#nge in /u#ntit" !em#n!is #n! -$#t t$e percent#ge c$#nge in price is. tAs best to c#lcul#te t$ese one #t # time.(alculatin4 the Percenta4e (han4e in Quantity &eandedT$e *ormul# use! to c#lcul#te t$e percent#ge c$#nge in /u#ntit" !em#n!e! is+JEDem#n!(NE1) > EDem#n!(47D)K 2 EDem#n!(47D)B" *illing in t$e v#lues -e -rote !o-n, -e get+ J110 > 1'0K 2 1'0 C (>L021'0) C >0.5((;1e note t$#tD 8$#nge in Eu#ntit" Dem#n!e! C >0.5((;(1e le#ve t$is in !ecim#l terms. npercent#ge terms t$is -oul! be >5(.(;D). No- -e nee! to c#lcul#te t$e percent#ge c$#nge inprice.(alculatin4 the Percenta4e (han4e in PriceSimil#r to be*ore, t$e *ormul# use! to c#lcul#te t$e percent#ge c$#nge in price is+J0rice(NE1) > 0rice(47D)K 2 0rice(47D)B" *illing in t$e v#lues -e -rote !o-n, -e get+J10 > HK 2 H C (12H) C 0.11111e $#ve bot$ t$e percent#ge c$#nge in /u#ntit" !em#n! #n! t$e percent#ge c$#nge in price, so-e c#n c#lcul#te t$e price el#sticit" o* !em#n!. ,inal *tep of (alculatin4 the Price "lasticity of &eand1e go b#c. to our *ormul# o*+0EoD C (D 8$#nge in Eu#ntit" Dem#n!e!)2(D 8$#nge in 0rice)1e c#n no- *ill in t$e t-o percent#ges in t$is e/u#tion using t$e *igures -e c#lcul#te! e#rlier.0EoD C (>0.5((;)2(0.1111) C >5.L00'1$en -e #n#l":e priceel#sticities -eAre concerne! -it$ t$eir #bsolute v#lue, so -e ignore t$eneg#tive v#lue. 1e conclu!e t$#t t$e price el#sticit" o* !em#n! -$en t$e price incre#ses *rom GHto G10 is 5.L00'.Ho6 &o We )nterpret the Price "lasticity of &eand?A goo! economist is not just intereste! in c#lcul#ting numbers. T$e number is # me#ns to #n en!Bin t$e c#se o* price el#sticit" o* !em#n! it is use! to see $o- sensitive t$e !em#n! *or # goo! isto#pricec$#nge. T$e$ig$ert$epriceel#sticit", t$emoresensitiveconsumers#retopricec$#nges. A ver" $ig$ price el#sticit" suggests t$#t -$en t$e price o* # goo! goes up, consumers-ill bu" # gre#t !e#l less o* it #n! -$en t$e price o* t$#t goo! goes !o-n, consumers -ill bu" #gre#t !e#l more. A ver" lo- price el#sticit" implies just t$e opposite, t$#t c$#nges in price $#velittle in*luence on !em#n!.4*ten #n #ssignment or # test -ill #s. "ou # *ollo- up /uestion suc$ #s =s t$e goo! price el#sticor inel#stic bet-een GH #n! G10=. To #ns-er t$#t /uestion, "ou use t$e *ollo-ing rule o* t$umb+ * 0EoD M 1 t$en Dem#n! is 0rice El#stic (Dem#n! is sensitive to price c$#nges) * 0EoD C 1 t$en Dem#n! is Init El#stic * 0EoD N 1 t$en Dem#n! is 0rice nel#stic (Dem#n! is not sensitive to price c$#nges)&ec#ll t$#t -e#l-#"signoret$eneg#tivesign-$en#n#l":ingpriceel#sticit",so0EoDis#l-#"spositive. nt$ec#seo*ourgoo!, -ec#lcul#te!t$epriceel#sticit"o*!em#n!tobe5.L00', so our goo! is price el#stic #n! t$us !em#n! is ver" sensitive to price c$#nges.Q.4: Write a detailed note of Price "lasticity of *upply?T$e 0rice El#sticit" o* Suppl" me#sures t$e r#te o* response o* /u#ntit" !em#n! !ue to # pricec$#nge. * "ouAve #lre#!" re#! T$e 0rice El#sticit" o* Dem#n! #n! un!erst#n! it, "ou m#" -#nttojust s.imt$is section, #s t$e c#lcul#tions #re simil#r. (Four course m#"use t$e morecomplic#te! Arc 0rice El#sticit" o* Suppl" *ormul#. * so "ouAll nee! to see t$e #rticle on ArcEl#sticit") 1e c#lcul#te t$e 0rice El#sticit" o* Suppl" b" t$e *ormul#+0EoS C (D 8$#nge in Eu#ntit" Supplie!)2(D 8$#nge in 0rice)(alculatin4 the Price "lasticity of *upplyFou m#" be #s.e! =6iven t$e *ollo-ing !#t#, c#lcul#te t$e price el#sticit" o* suppl" -$en t$eprice c$#nges *rom GH.00 to G10.00= Ising t$e c$#rt on t$e bottom o* t$e p#ge, All -#l. "out$roug$ #ns-ering t$is /uestion.)irst -e nee! to *in! t$e !#t# -e nee!. 1e .no- t$#t t$e origin#l price is GH #n! t$e ne- price isG10, so -e $#ve 0rice(47D)CGH #n! 0rice(NE1)CG10. )rom t$e c$#rt -e see t$#t t$e /u#ntit"supplie! (m#.e sure to loo. #t t$e suppl" !#t#, not t$e !em#n! !#t#) -$en t$e price is GH is 1'0#n! -$en t$e price is G10 is 110. Since -eAre going *rom GH to G10, -e $#veESuppl"(47D)C1'0 #n! ESuppl"(NE1)C510, -$ere =ESuppl"= is s$ort *or =Eu#ntit"Supplie!=. So -e $#ve+0rice(47D)CH0rice(NE1)C10ESuppl"(47D)C1'0ESuppl"(NE1)C510To c#lcul#te t$e price el#sticit", -e nee! to .no- -$#t t$e percent#ge c$#nge in /u#ntit" suppl"is #n! -$#t t$e percent#ge c$#nge in price is. tAs best to c#lcul#te t$ese one #t # time.(alculatin4 the Percenta4e (han4e in Quantity *upplyT$e *ormul# use! to c#lcul#te t$e percent#ge c$#nge in /u#ntit" supplie! is+JESuppl"(NE1) > ESuppl"(47D)K 2 ESuppl"(47D)B" *illing in t$e v#lues -e -rote !o-n, -e get+J510 > 1'0K 2 1'0 C ((021'0) C 0.LSo -e note t$#t D 8$#nge in Eu#ntit" Supplie! C 0.L(T$is is in !ecim#l terms. n percent#geterms it -oul! be L0D). No- -e nee! to c#lcul#te t$e percent#ge c$#nge in price.(alculatin4 the Percenta4e (han4e in PriceSimil#r to be*ore, t$e *ormul# use! to c#lcul#te t$e percent#ge c$#nge in price is+J0rice(NE1) > 0rice(47D)K 2 0rice(47D)B" *illing in t$e v#lues -e -rote !o-n, -e get+J10 > HK 2 H C (12H) C 0.11111e $#ve bot$ t$e percent#ge c$#nge in /u#ntit" supplie! #n! t$e percent#ge c$#nge in price, so-e c#n c#lcul#te t$e price el#sticit" o* suppl".,inal *tep of (alculatin4 the Price "lasticity of *upply1e go b#c. to our *ormul# o*+0EoS C (D 8$#nge in Eu#ntit" Supplie!)2(D 8$#nge in 0rice)1e no- *ill in t$e t-o percent#ges in t$is e/u#tion using t$e *igures -e c#lcul#te!.0EoD C (0.L)2(0.1111) C O.(1$en -e #n#l":e price el#sticities -eAre concerne! -it$ t$e #bsolute v#lue, but $ere t$#t is not#n issue since -e $#ve # positive v#lue. 1e conclu!e t$#t t$e price el#sticit" o* suppl" -$en t$eprice incre#ses *rom GH to G10 is O.(.Ho6 &o We )nterpret the Price "lasticity of *upply?T$e price el#sticit" o* suppl" is use! to see $o- sensitive t$e suppl" o* # goo! is to # pricec$#nge. T$e$ig$ert$epriceel#sticit",t$emoresensitivepro!ucers#n!sellers#retopricec$#nges. A ver" $ig$ price el#sticit" suggests t$#t -$en t$e price o* # goo! goes up, sellers -illsuppl" # gre#t !e#l less o* t$e goo! #n! -$en t$e price o* t$#t goo! goes !o-n, sellers -illsuppl" # gre#t !e#l more. A ver" lo- price el#sticit" implies just t$e opposite, t$#t c$#nges inprice $#ve little in*luence on suppl".4*ten "ouAll $#ve t$e *ollo- up /uestion =s t$e goo! price el#stic or inel#stic bet-een GH #n!G10=. To #ns-er t$#t, use t$e *ollo-ing rule o* t$umb+ * 0EoS M 1 t$en Suppl" is 0rice El#stic (Suppl" is sensitive to price c$#nges) * 0EoS C 1 t$en Suppl" is Init El#stic * 0EoS N 1 t$en Suppl" is 0rice nel#stic (Suppl" is not sensitive to price c$#nges) &ec#ll t$#t -e#l-#"s ignoret$eneg#tivesign-$en#n#l":ingpriceel#sticit", so0EoSis#l-#"s positive. n our c#se, -e c#lcul#te! t$e price el#sticit" o* suppl" to be O.(, so our goo! isprice el#stic #n! t$us suppl" is ver" sensitive to price c$#nges.E.'+ 1rite # !et#ile! note o* T$eor" o* 8ostsP8ost t$eor" is rel#te! to pro!uction t$eor", t$e" #re o*ten use! toget$er. ?o-ever, t$e /uestion isusu#ll" $o- muc$ to pro!uce, #s oppose! to -$ic$ inputs to use. T$#t is, #ssume t$#t -e usepro!uction t$eor" to c$oose t$e optim#l r#tio o* inputs (eg. 5 *e-er engineers t$#n tec$nici#ns),$o- muc$ s$oul! -e pro!uce in or!er to minimi:e costs #n!2or m#ximi:e pro*itsP 1e c#n #lsole#rn # lot #bout -$#t .in!s o* costs m#tter *or !ecisions m#!e b" m#n#gers, #n! -$#t .in!s o*costs !o not.Opportunity Costsn#!!itionto#ccountingpro*it, m#n#gersmust consi!ert$ecost o*inputssupplie!b"t$eo-ners (o-ners c#pit#l #n! l#bor).Accounting 8osts: Costs that would appear as costs in an accounting statement.4pportunit" 8osts: The value of all inputs to a firmsproduction in theirmost valuablealternative use.Fixed costs, variable costs, and sunk costsSome inputs v#r" -it$ t$e #mount pro!uce! #n! ot$ers !o not. T$e *irm3s computer s"stem #n!#ccount#nts m#" be #ble to $#n!le # l#rge volume o* s#les -it$out incre#sing t$e number o*computers or #ccount#nts, *or ex#mple. nputs t$#t !o not v#r" -it$ t$e #mount pro!uce!, li.e#ccount#nts #n! computers, #re c#lle! *ixe! inputs.Most inputs #re *ixe! onl" *or # cert#in r#nge o* pro!uction. A me!ic#l o**ice m#" be #ble to$#n!le m#n" #!!ition#l p#tients -it$out #!!ing #n! o**ice #ssist#nt or extr# p$ones.T$e p$ones #n! o**ice #ssist#nts #re *ixe! inputs. But, i* t$e number o* extr# p#tients is l#rgeenoug$, t$e *irm nee!s extr# o**ice st#**.Reasons for fixed costs:1. S#l#rie! -or.ers. S#l#rie! -or.ers #re # *ixe! input i* t$e -or.er c#n -or. overtime -it$out#!!ition#l compens#tion (!octors p#i! # *ee *or service #re v#ri#ble inputs, s#l#rie! me!ic#l st#**#re *ixe! inputs).5. )ixe! $ours #t -or.. An $ourl" -or.er sometimes c#nnot be sent $ome e#rl" i* not enoug$-or. is #v#il#ble. T$ere*ore, -or.ers m#" not be bus" #n! be #ble to $#n!le extr# -or. -it$out#!!ition#l $ours.O. Time to #!just. Some inputs,li.e m#c$ines,t#.e time to purc$#se #n! inst#ll.8onversel",uns.ille!l#bor m#"be#!juste!more/uic.l"t$roug$overtime, temps, etc. T$ere*ore, b"necessit" t$e *irm m#" onl" be #ble to v#r" pro!uction b" incre#sing l#bor in t$e s$ort run.Tot#l 9#ri#ble8ostThetotal cost of all inputsthat changewiththeamount produced(allvariable inputs).Tot#l *ixe! costs The total cost of all inputs that do not vary with the amount produced (all fixedinputs).8onsi!er t$e T$ompson m#c$ine comp#n". T$e *irm uses ' m#c$ines to m#.e m#c$ine p#rts.Bec#use o* t$e time to #!just, m#c$ines #re # *ixe! cost, -$ile t$e number o* -or.ers v#ries -it$t$e #mount pro!uce!. 7#bor is # v#ri#ble cost.Sun. costs Are costs that have been incurred and cannot be reversed.An"costsincurre!int$ep#st, orin!ee!#n"*ixe!cost *or-$ic$p#"ment must bem#!ereg#r!less o* t$e !ecisionis irrelev#nt *or #n"m#n#geri#l !ecision. Suppose "ou$ire #nexecutive -it$ # G100,000 signing bonus, plus G500,000 s#l#r". A*ter $iring, "ou m#" *in! t$eexecutive !oes not live up to expect#tions. ?o-ever, i* t$e executive3s m#rgin#l revenue pro!uctis G500,001, t$e executive still gener#tes G1 in pro*its rel#tive to $is s#l#r" #n! t$ere*ore s$oul!be ret#ine!. But i* $is M&0 is G1HH,HHH, t$e *irm loses #n extr# G1 e#c$ "e#r t$e" .eep $im, so$e s$oul! be let go. T$e bonus is # sun. cost #n! !oes not #**ect t$e retention !ecision.T$e principle o* sun. costs is e/uiv#lent to t$e s#"ing Q!on3t t$ro- goo! mone" #*ter b#!.RSometimes#!ecisionc#nbem#!etorecoverp#rt o*#*ixe!cost. 0er$#psonecoul!sell#*#ctor" #n! recover p#rt o* t$e *ixe! costs. T$en onl" t$e !i**erence is sun.. )or ex#mple, i* -ec#n sell # buil!ing *or -$ic$ -e p#i! G'00,000 *or GO00,000, t$en onl" G500,000 is sun..Sun. costs #re per$#ps one o* t$e most ps"c$ologic#ll" !i**icult t$ings to ignore. Ex#mples+1. )in#nce. Stu!ies s$o- investors let sun. costs enter t$eir !ecision m#.ing. 1$#t price t$estoc. -#s purc$#se! #t is sun. #n! t$ere*ore irrelev#nt. 1$#t m#tters is onl" -$et$er or not t$isstoc. o**ers t$e best return *or t$e ris.. Fet, investors #re reluct#nt to sell stoc.s -$ose price $#sgone !o-n.5. 8ut "our lossesP 8onsi!er t$e -#r in A*g$#nist#n. 1e $#ve sun. billions, but t$#t s$oul! notenter our !ecision #bout -$et$er or not to st#".O. 0ricingin$ig$rent !istricts. 8onsi!errest#ur#ntsin#$ig$rent !istrict (s#"#n#irport).S$oul!t$e"t#.et$erent into#ccount -$ensettingpricesPNo. n*#ct, prices#re$ig$notbec#use o* t$e rent, but t"pic#ll" bec#use o* t$e l#c. o* competitors.)) *hort run costs1e use s$ort run costs prim#ril" to compute $o- muc$ to pro!uce -$ile m#ximi:ing pro*its.1e use long run costs to #ns-er /uestions li.e s$oul! t$e *irm exp#n!, contr#ct, merge, etc.Aver#ge 8osts: Costs divided by output.M#rgin#l 8osts: The cost of one additional unit of an input.?ere is t$e not#tion+T"pe o* 8ost Tot#l 8ost e/u#ls 9#ri#ble 8osts 0lus )ixe! 8ostsTot#l T8 C T9 8 ST)8Aver#ge AT8 C T8E C A9 8 C T9 8E SA)8 C T)8EM#rgin#l M8 C !T8!E C TT8TE0roperties o* cost *unctions in t$e s$ort run+1. Tot#l costs o* incre#se -it$ E, t$e /u#ntit" pro!uce!.5. Aver#ge Tot#l costs !ecline -it$ E, but eventu#ll" rise. T$e *ixe! costs #re spre#! over m#n"more units o* pro!uction #t $ig$ E, re!ucing #ver#ge costs. All o* t$e extr# -or.ers re/uire! *orpro!ucing#!!ition#l units-$ent$e*#ctor"isne#rc#p#cit"st#rtstoincre#se#ver#gecostseventu#ll".O. M#rgin#l costs usu#ll" !ecline t$en incre#se, but must eventu#ll" incre#se. At *irst, pro!ucingone #!!ition#l unit is m#" c$e#per t$#n t$e l#st unit, !ue to speci#li:#tion. ?o-ever, eventu#ll"!iminis$ingreturnssetsin#n!t$e-or.ersjust get ine#c$ot$er3s-#".T$en#ver"l#rgenumber o* #!!ition#l -or.ers mig$t be nee!e! to pro!uce #n #!!ition#l unit. A0ro*itm#ximi:#tion -it$ per*ect competition 7et us suppose t$#t "ou #re # $"pot$etic#l m#n#ger o* #group o* cruise s$ips. Ising !#t# *rom previous "e#rs, "ou estim#te t$e s$ort run cost *unction is(-e -ill see $o- to !o t$is estim#tion belo-)+T8 C (0 SE550 ((H)?ere E is t$e number o* cruises t$e s$ip t#.es (not t$e number o* p#ssengers). T$e cost o* t$es$ip is G(0 million, -$ic$ is sun.. Notice in e/u#tion ((H) t$#t t$e cost o* t$e s$ip !oes not!epen!ont$enumber o*cruisest$es$ipt#.es. Suppose*urt$er t$#t e#c$cruisegener#tesrevenue o* GO million.M#ximi:e pro*its+ m#x T C T& U T8 C OE U (0 UE5(;0)T#.e t$e !eriv#tive to get t$e slope #n! set t$e slope e/u#l to :ero+O UE10C 0 V E C O0. (;1)Notice t$#t t$e *ixe! costs $#ve !roppe! out. T$e m#t$ #grees+ *ixe! costs !o not m#tter *or our!ecision. n gener#l, to m#ximi:e pro*its -e set m#rgin#l revenue ($ere GO) e/u#l to m#rgin#lcosts ($ere E210).M& C M8. (;5)n # competitive in!ustr", *irms $#ve no #bilit" to in*luence t$e price. Ex#mples inclu!e m#r.etm#.ersinstoc.m#r.ets, commo!ities, #n!l#rge*oo!m#r.ets. )or ex#mple, #nin!ivi!u#l*#rmer m#" pro!uce #s muc$ corn #s !esire! #n! sell t$e corn on t$e commo!ities m#r.ets -it$noc$#ngeinprice. &eg#r!lesso* t$e#mount pro!uce!b"#nin!ivi!u#l *irm, t$epriceisunc$#nge! #n! M& C 0. So in competitive in!ustries, -e set+0 C M8. (;O)T$e *irm s$oul! pro!uce one more unit i* -e c#n sell it *or more t$#n it costs to pro!uce.T$e *irm m#.es pro*its in t$is c#se. n t$e next set o* notes, -e -ill !o t$e c#se -$ere *irms $#vepricing po-er.T$e m#rgin#l revenue is t$e price o* t$e cruise, e/u#l to GO million. 1e c#n see t$#t m#rgin#lrevenue e/u#ls m#rgin#l costs some-$ere bet-een O0 #n! O' cruises.10ro!ucing t$e O0t$ cruise gives us GO o* revenue, enoug$ to cover t$e costs o* pro!ucing t$eO0t$ cruise, -$ic$ (using t#ble () is #pproxim#tel" G5.;'. ?o-ever, t$e O't$ cruise loses mone".T$e t#ble estim#tes t$#t cruise -oul! cost GO.5', #n! since revenues #re GO, t$e cruise -oul! lose#n estim#te! G0.5' million.T$e*ixe!costs#reirrelev#nt $ere. 1$enconsi!eringt$e*ixe!costs, t$e*irm$#sneg#tivepro*its reg#r!less o* $o- m#n" cruises t$e *irm t#.es. T$e m#ximum pro*its occurs #t O0 cruises+T C T& U T8 C O W O0 U T(0 S O0550 T C UG1'. (;L)1e $#ve #lre#!" p#i! t$e *ixe! costs, so -e mig$t #s -ell lose #s little #s possible.5+ +rea3 "7en /nalysisAn import#nt consi!er#tion -$en !eci!ing -$et$er to continue oper#tions in # p#rticul#r m#r.et,exp#n! into # m#r.et, or st#rt # ne- business is # bre#. even #n#l"sis. 1e c#n !o # bre#. even#n#l"sis -it$ # cost *unction.n # bre#. even #n#l"sis, t$e /uestion is+ $o- muc$ pro*it is re/uire! to ex#ctl" p#" o** #ll *ixe!costsP Altern#tivel", $o- muc$ revenue is re/uire! to p#" o** t$e #ver#ge v#ri#ble costs #n! t$e*ixe! costs+T C 0 C T& U T8 (;')0 C 0 W E U T)8 U T9 8 (;()0 C 0 W E U T)8 U A9 8 W E (;;)E CT)80 U A9 8 (;