Learning Unit 4.
Microeconomic Aspects – Producer Behaviour
What are producers?
Def: It is an organization that buys / hires inputs and
manages them to produce goods, which are in turn sold
as outputs.
Inputs – Production factors & Intermediary products (like
raw materials)
• Variable inputs – labour (short run quantity adjusted)
• Fixed inputs – land (long run quantity adjusted)
Outputs – Products and/or Services
Why do we need producers in an economy?
2
Main Objective
Maximise profit
How?
• Keep costs as low as possible
• Getting as high as possible revenues for products /
services
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Production Function
Relationship between the amount of different inputs that is
used to produce a specific good or service and the
amount of outputs produced from these outputs.
Labour vs. Capital
Short run – Period in which some of a producer’s inputs
are fixed
Long run – Period in which all inputs are variable
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Production Function
Cookies per hour
(Physical output)
Production
function
Number of 5
workers
Production Function
Shape – NB!
Curve slopes upward at first at an increasing rate, then at
a decreasing rate, reaches a maximum and thereafter
decreases.
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Output
Marginal output – the addition to total output due to an
increase of one unit of the variable input (labour)
Diminishing marginal product – as the number of workers
increase, the marginal output first increases and
thereafter decreases. Why do this happen?
Average output – total output divided by the quantity of the
variable input, which is used to produce the output
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Output
No of workers TO MO AO
0 0 - -
1 50 50 (50 – 0) 50 (50/1)
2 110 60 (110 – 50) 55 (110/2)
3 160 50 (160 – 110) 53.33 (160/3)
4 200 40 (200 – 160) 50 (200/4)
5 230 30 (230 – 200) 46 (230/5)
6 250 20 (250 – 230) 41.67 (250/6)
7 260 10 (260 – 250) 37.14 (260/7)
8 260 0 (260 – 260) 32.5 (260/8) 8
9 250 -10 (250 – 260) 27.78 (250/9)
Costs
Expenditure of a producer on the necessary inputs
involved in the production process = costs
Economists take into account implicit as well as explicit
costs
Accountants only take explicit costs into account
Explicit costs – input costs that require that actual money
is paid by the producer to another party like wages
Implicit costs – do not require that actual money is by paid
to another party, refers to opportunity cost
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Short run costs
Total fixed cost – Costs connected to the fixed factors of
production
Total variable cost – Related directly to the output of the
producer, if a producer produces more TVC will go up
as well.
Total cost – TFC + TVC
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Costs
No of TO Cost of Cost of Total cost
workers factory workers
0 0 30 0 30
1 50 30 10 40
2 110 30 20 50
3 160 30 30 60
4 200 30 40 70
5 230 30 50 80
6 250 30 60 90
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7 260 30 70 100
8 260 30 80 110
9 250 30 90 120
Total fixed costs
Cost
(R)
30 TFC
0 Output
12
Total variable costs
Cost
(R) TVC
0 Output
13
Total cost
Cost TC
(R)
30
0 Output
14
Further short run costs
Average fixed cost = TFC / Output
Average variable cost = TVC / Output
Average total cost = TC / Output
Marginal cost = Change in total costs when output is
changed by one unit, MC = ∆TC/∆Q
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Further costs
N TO TFC TVC TC AFC AVC ATC MC
0 0 30 0 30 - - - -
1 50 30 10 40 0.6 0.2 0.8 0.2
2 110 30 20 50 0.27 0.18 0.45 0.17
3 160 30 30 60 0.19 0.19 0.38 0.2
4 200 30 40 70 0.15 0.2 0.5 0.25
5 230 30 50 80 0.13 0.22 0.5 0.33
6 250 30 60 90 0.12 0.24 0.36 0.5
7 260 30 70 100 0.115 0.27 0.385 1
8 260 30 80 110 0.115 0.31 0.425 Infinity 16
9 250 30 90 120 0.12 0.36 0.48
Average fixed cost
Cost
(R)
30
AFC
0 Output 17
Average variable cost
Cost
(R)
AVC
0 Output
18
Average total cost
Cost
(R)
ATC
0 Output
19
Marginal cost
Cost
MC
(R)
0 Output
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Long run costs
In the long run producers can adjust ALL (land included)
production factors
We only concentrate on the characteristics & shape of the
long run average cost curve
The long run average cost curve shows the minimum per
unit cost at every output level, when all inputs are
variable and any desired production facility can be
created.
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Long run costs
Average
cost
SAC(6)
B SAC(1)
A SAC(5)
LAC
C
SAC(2) SAC(3)
SAC(4)
0 Output
Q1 Q2 Q3 22
Long run average cost curve
Consists of a series of points on different short run cost
curves
Points reflect the lowest costs possible for the production
of any given output.
When producer expand its capacity it is likely that it will
experience economies of scale or diseconomies of
scale.
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Economies / Diseconomies of scale
Economies of scale are the cost advantages of operating
on a larger scale (e.g. buying in bulk, mass production)
Diseconomies of scale are disadvantages that arise when
producers grow too large (e.g. takes longer to make
decisions)
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Revenues
Payment that producers receive for selling a good/service
Total Revenue (TR) – total amount of earnings received
by a firm from the selling of a product and/or services
TR = P x Q
Average revenue – TR/Q – just another name for the price
of a product. The demand curve is also frequently
referred to as the AR curve
Marginal revenue – the additional revenue obtained when
sales are increased by one unit.
MR = ∆TR/∆Q 25
Profit
Difference between a firm’s total revenue and total cost (if
positive = profit, if negative = loss)
Profit = TR – TC
Economic profit – TR minus explicit AND implicit costs
Accounting profit – TR minus (only) explicit costs
Accounting profit usually > economic profit
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