IB+Costs+and+revenue



Key learning outcomes: To understand the relationship between average and marginal values eg between average and marginal product. Now draw the AP and MP curves Where does diminishing marginal returns set in?
 * Number of workers || Total output || Average Product || Marginal Product ||
 * 0 || 0 ||  ||   ||
 * 1 ||  ||   || 10 ||
 * 2 ||  ||   || 15 ||
 * 3 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">45 ||  ||   ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">4 ||  || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">18.75 ||   ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">5 ||  ||   || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">25 ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">6 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">120 ||  ||   ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">7 ||  ||   || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">15 ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">8 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">145 ||  ||   ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">9 ||  ||   || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">5 ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">10 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">150 ||  ||   ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">11 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">145 ||  ||   ||

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student Activity <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

__<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The difference between accounting and Economic profits- an example __ <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Wages= $ 40, 000 <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Raw materials= $ 100,000 <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Own the factory which they have been offered 90,000 by another firm to rent it from them <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Electricity costs= $ 40,000 <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Total revenue = $ 450,000 <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Depreciation costs= $ 20,000 <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Owner has given up their previous job to run the company. In her previous job she was paid $ 70,000 <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The owner put $ 60,000 of their own money into the business. Present savings rates are 5% at the bank. <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Identify the accounting and economic profit for the firm

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">So from the powerpoint above you should now realise that firms will in the long run leave the industry if they are not making at least normal profits. However it is not unusal to see firms in the short run, remain in the industry. But to do this they must at least cover their variable costs. If P<AVC then a firm will leave the industry in the short run. This is covered on P96-7 in the textbook. Read this section and in particular copy diagram 6.12.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">A numerical example:

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">There are two hotels- A and B. Both are making a loss of $1M. Given the following figures one will leave in the short run and one will stay. Which is which?


 * || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Hotel A || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Hotel B ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">TFC || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">0.5M || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">2M ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">TVC || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">2.5M || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1M ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">TC || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">3M || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">3M ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">TR || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">2M || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">2M ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Loss || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1M || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1M ||

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">read and make notes from P 99 in your textbook. Split into groups each one has to find an example of revenue maximisation; growth maximisation; satificing and Corporate Social Responsibility. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Also read the following article: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 0px; overflow: hidden;">
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">But do all firms wish to maximise short run profits? **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Extension task: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Profits



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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Essay Assignment:
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Why do short-run marginal costs eventually rise? (10) <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Why may long-run average cost curves be "L-shaped"? (10)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Some scaffolding for your essay:

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(1) Introduction. Explain the title.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(2) Define the short run. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Define MC. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Outline the theory which is important (the law of diminishing returns) and provide a definition.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(3) Develop the law of diminishing returns to the point where you provide the standard diagram showing the relationship between marginal product and average product.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(4) Develop the law to illustrate its impact upon costs which is best done by use of a simple numerical example (but a simple, clear exposition is just as good). <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Illustrate this by drawing the standard diagram showing the relationship between short-run marginal and average costs.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(5) Define the long run. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Outline the theory which is important, i.e. economies and diseconomies of scale. Define and provide an explanation of each. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Provide the standard diagram illustrating the above.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(6) State that some observers believe that firms can prevent diseconomies of scale from setting in. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Explain their reasoning. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Provide the standard diagram illustrating a long-run, "L-shaped" average cost curve.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(7) Conclusion.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">It is imperative that all diagrams are explained. Examiners will interpret the lack of an explanation as a lack of understanding and will mark accordingly.