A Level Model Answer: Theory of the Firm
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In production, a distinction is made between short-run cost curves and long-run cost curves. Using appropriate cost curve diagrams, explain this distinction. (12 marks)
城市猎人粤语The costs that a firm incurs can be parated into fixed costs and variable costs, which together make up a firm’s total costs. Fixed costs remain constant regardless of quantity output – for example, the rent paid on a factory ud when producing a good. Variable costs change as output increas or decreas. An example is the wage cost of labour. To produce more output, the firm hires more labour, and has incread wage costs. The more variable inputs a firm us, the greater the total variable costs.
In microeconomics, the ‘short-run’ refers to the period of time in which at least one factor of production (usually land, labour and/or capital) is fixed. For example, the time it takes for a contract with a property owner to end before the firm can move to a different location.
Figure 1 Short-run cost curves
In Figure 1, the AFC curve indicates that average fixed cost falls continuously as output increas, becau it reprents the amount of total fixed costs divided by an ever growing quantity of output. The average variable cost, average total cost and marginal cost curves, although different from one other, all follow the same general pattern: at first they fall, reach a minimum, and then they begin to ri.
Marginal cost ris with the amount of output produced, reflecting the property of diminishing marginal product – as units of one input are added (with other inputs held constant) a point will be reached where the resulting additions to output will begin to decrea (marginal product will decline). Consider the limited size of the factory discusd earlier – we can keep adding more and more variable inputs (such as labour) but, constrained by the limited space, we will eventually e no further increas in output and output may even start to fall due to overcrowding of the fixed factor(s). Thus the cost of producing an additional cost continues to ri even though the firm may be gaining no benefit in terms of incread output.
国家级运动员标准In the ‘long-run’, all factors of production become variable – in the example given, the firm can move to a bigger or less expensive factory. Becau many costs are fixed in the short run but variable in the long run, a firm’s long-run cost curves differ from its short-run cost curves. As the firm plans its future activities in the long run, it can lect any size or scale of operation depending on the quantity of output it is aiming for. The particular size it lects will be the one that minimis costs for that level of output. The long-run average total curve is the curve that is tangent to each of the short-run cost curves. Long run average total costs reprent the lowest possible average cost, or cost per unit of output, for every level of output, when all resources are variable.主题语言>小花鼓绕口令
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Figure 2 Long-run average total cost curves
The U-shape of the long-run ATC curve is a result of economies and diconomies of scale. Economies of scale refer to the benefits in terms of falling average total cost gained from large scale production, occurring for a number of reasons. Firstly, as the scale of production increas, more workers must be employed, allowing for greater labour specialisation. As each worker specialis in a narrower range of tasks that make u of existing skills, and develop skills through repetition, worker efficiency is incread, allowing output to be produced at a lower average cost.
Larger scales of production allow for more managers to be employed, each of whom can be specialid in a particular area, again resulting in greater efficiency and lower average cost.
Large machines are often more efficient than smaller ones. However, a small firm with a small volume of output cannot make effective u of large machines, and so is forced to u smaller, less efficient ones. Some machines are only available in large sizes that req
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uire large volumes of output in order to be ud effectively. Some production process, such as mass production asmbly lines, require large volumes of inputs and output in order to be ud efficiently. Costs of certain activities such as advertising, design, rearch and development result in lower average costs if they can be spread over large volumes of output.
However, as a firm increas its scale of production, costs per unit of output may eventually start to increa. As a firm grows, management faces co-ordination difficulties. Communication and decision-making will be slower. Staff may feel alienated in a large organisation and unless they are monitored effectively, the quality and output of their work may decline.
Evaluate the view that productive and allocative efficiency is more likely to be achieved in perfectly competitive industries than monopolies. [13 marks]
Productive efficiency occurs when production takes place at the lowest possible cost. Allocative efficiency occurs when firms produce the particular combination of goods and s
ervices that consumers prefer. It is achieved when price equals marginal cost. This is becau the price paid by consumers to acquire a good reflects the marginal benefit they derive from consumption of an additional of the good and shows the amount of money they are willing to pay to buy one more unit.
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