ECONOMICS Johnson Hsu July 2014. Economics of work and leisure 1. Nature of work and leisure and trends in employment and earnings 2. Market Structures.

ECONOMICSECONOMICS

Johnson HsuJohnson Hsu

July 2014 July 2014

Economics of work and Economics of work and leisureleisure

1.1. Nature of work and leisure and Nature of work and leisure and trends in employment and earningstrends in employment and earnings

2.2. Market Structures and competitive Market Structures and competitive behavior in leisure marketsbehavior in leisure markets

3.3. Labour demand, supply and wage Labour demand, supply and wage determinationdetermination

4.4. Market failure and the role of the Market failure and the role of the government and union in the labour government and union in the labour marketmarket

Short-run costs of Short-run costs of productionproduction

Short-run: the time period Short-run: the time period when at least one factor of when at least one factor of production, usually capital, production, usually capital, is in fixed supply.is in fixed supply.

Fixed costsFixed costs

Costs that do not change in Costs that do not change in the short run with change in the short run with change in outputoutput

Variable costsVariable costs

Costs that change with Costs that change with change in outputchange in output

Labour cost are fixed oLabour cost are fixed or variable ?r variable ?

Total cost (TC)Total cost (TC)

It is made up of fixed and It is made up of fixed and variable costs in the short variable costs in the short run. As output rises, total run. As output rises, total cost increase.cost increase.

Average cost (AC)Average cost (AC)

Also often called unit cost, it Also often called unit cost, it total cost divided by output. total cost divided by output.

Average fixed cost Average fixed cost (AFC)(AFC)

Total fixed cost divided by Total fixed cost divided by outputoutput

Average variable cost Average variable cost (AVC)(AVC)

Total variable cost divided by Total variable cost divided by outputoutput

Marginal cost (MC)Marginal cost (MC)

The change in total cost The change in total cost resulting from changing resulting from changing output by one unitoutput by one unit

Relationship between Relationship between MC and ACMC and AC

OutpuOutputt TCTC MCMC TFCTFC TVCTVC ACAC AFCAFC AVCAVC

0 100 0 100 0 0 0 0

1 180 80 100 80 180 100 80

2 250 70 100 150 125 50 75

3 300 50 100 200 10033.3

366.6

7

4 360 60 100 260 90 25 65

5 440 80 100 340 88 20 68

6 540 100 100 440 9016.6

773.3

3

Costs of productionCosts of production

The relationship The relationship between TC, TVC and between TC, TVC and

TFCTFC

Long-run costsLong-run costs

The period of time when it is The period of time when it is possible to alter all factors of possible to alter all factors of productionproduction

Relationship between Relationship between the SRAC and the LRAC the SRAC and the LRAC

curvescurves

If a firm is producing in the most efficient way possible in If a firm is producing in the most efficient way possible in the long run, but they then want to expand, they will have to the long run, but they then want to expand, they will have to expand along a short run average cost curve as they will be expand along a short run average cost curve as they will be limited by their fixed factors. However, in the long run they limited by their fixed factors. However, in the long run they can get more of the fixed factors and so will move back can get more of the fixed factors and so will move back down to the long run average cost curve. This is why the down to the long run average cost curve. This is why the LRAC is made up of a series of SRAC curves.LRAC is made up of a series of SRAC curves.

Minimum efficient Minimum efficient scalescale

The lowest level of output at The lowest level of output at which full advantage can be which full advantage can be taken of economies of scaletaken of economies of scale

Economy scaleEconomy scale

A reduction in long-run A reduction in long-run average costs resulting from average costs resulting from an increase in the scale of an increase in the scale of productionproduction

Economies of ScaleEconomies of Scale

Diseconomy of scaleDiseconomy of scale

An increase in long-run An increase in long-run average costs caused by an average costs caused by an increase in the scale of increase in the scale of productionproduction

Diseconomies of scale Diseconomies of scale

Economies of scaleEconomies of scale

Constant returns of Constant returns of scalescale

long-run average cost long-run average cost remaining unchanged when remaining unchanged when the scale of production the scale of production increaseincrease

Internal economies Internal economies scalescale

Economies of scale that occur Economies of scale that occur within the firm as a result of within the firm as a result of its growthits growth

A cinema operator may A cinema operator may achieve a number of benefits achieve a number of benefits

from growing in sizefrom growing in size

Purchasing economies of scale.Purchasing economies of scale. Selling economies.Selling economies. Technical economies of scale.Technical economies of scale. Managerial economies of scale.Managerial economies of scale. Financial economies of scale.Financial economies of scale. Risk-bearing economies.Risk-bearing economies.

External economies of External economies of scalescale

Saving in costs available to Saving in costs available to firms arising from the growth firms arising from the growth of the industry as a whole.of the industry as a whole.

Development of good Development of good reputation and improved reputation and improved infrastructure for producing a infrastructure for producing a good quality product.good quality product.

Internal diseconomies Internal diseconomies of scaleof scale

Difficult to run a large firm, keDifficult to run a large firm, keeping a check on everything thaeping a check on everything that is happening and co-ordinatint is happening and co-ordinating productiong production

Internal diseconomies Internal diseconomies of scaleof scale

Diseconomies of scale Diseconomies of scale experience by a firm caused experience by a firm caused by its growthby its growth

External diseconomies External diseconomies of scaleof scale

Diseconomies of scale Diseconomies of scale resulting from the growth of resulting from the growth of the industry, affecting firms the industry, affecting firms within the industrywithin the industry

Firms sell goods and Firms sell goods and services in return for revenue. services in return for revenue. The total payment a firm The total payment a firm received is not surprisingly received is not surprisingly called total revenue. While called total revenue. While total cost expected to rise with total cost expected to rise with output, total revenue may not output, total revenue may not always move in the same always move in the same direction as sales. Why?direction as sales. Why?

Average revenue (AR)Average revenue (AR)

Total revenue divided by the Total revenue divided by the output soldoutput sold

Marginal revenue (MR)Marginal revenue (MR)

The change in total revenue The change in total revenue resulting from the sale of one resulting from the sale of one more unitmore unit

Relationship between Relationship between AR and MRAR and MR

Unit Unit soldsold

ARAR TRTR MRMR

0 0 0 0

1 10 10 10

2 10 20 10

3 10 30 10

4 10 40 10

5 10 50 10

6 10 60 10

7 10 70 10

Relationship between Relationship between AR and MRAR and MR

Perfect competitionPerfect competition

A market structure with many A market structure with many buyers and sellers, free entry buyers and sellers, free entry and exit and an identical and exit and an identical productproduct

Price takerPrice taker

A firm that has no influence A firm that has no influence on priceon price

Price makerPrice maker

A firm that influence price A firm that influence price when it changes its outputwhen it changes its output

Average, total and marginal Average, total and marginal revenue of a firm with market revenue of a firm with market

powerpower

Unit Unit soldsold

ARAR TRTR MRMR PEDPED

00 0 0 0

11 20 20 20 Elastic

22 18 36 16 Elastic

33 16 48 12 Elastic

44 14 56 8 Elastic

55 12 60 4 Elastic

66 10 60 0 Unit elastic

77 8 56 -4 inelastic

Unit elasticity of Unit elasticity of demanddemand

When a given percentage When a given percentage change in price cause an change in price cause an equal percentage change in equal percentage change in demand, leaving total revenue demand, leaving total revenue unchangedunchanged

Predatory pricingPredatory pricing

Setting price low with the aim Setting price low with the aim of forcing rival out of the of forcing rival out of the marketmarket

Superior goodSuperior good

A good with positive income A good with positive income elasticity of demand greater elasticity of demand greater than onethan one

Market structureMarket structure

MonopolyMonopoly OligopolyOligopoly Monopolistic competitionMonopolistic competition Pure competitionPure competition

How to decide the market How to decide the market structure firm operate?structure firm operate?

The market concentration ratioThe market concentration ratio Whether there are barrier to Whether there are barrier to

entry and exitentry and exit The type of profits earned in The type of profits earned in

the long runthe long run The behavior and performance The behavior and performance

of firmsof firms

Barrier to entryBarrier to entry

Obstacles to new firms Obstacles to new firms entering a marketentering a market

Five main barriers to Five main barriers to entryentry

By lawBy law High start-up costsHigh start-up costs Brand namesBrand names Economies of scaleEconomies of scale Limit pricingLimit pricing

Limit pricingLimit pricing

Setting a price low to Setting a price low to discourage the entry of new discourage the entry of new firms into the marketfirms into the market

Barriers to exitBarriers to exit

Obstacles to firm leaving a Obstacles to firm leaving a marketmarket

Three main barriers to Three main barriers to exitexit

Sunk costsSunk costs Advertising expenditureAdvertising expenditure contractscontracts

Contract Use 2013

MonopolyMonopoly

Profits are maximised where maProfits are maximised where marginal revenue equals marginal rginal revenue equals marginal costcost

Profit maximisationProfit maximisation Achieving the highest Achieving the highest

possible profit where possible profit where marginal cost equals marginal cost equals marginal revenuemarginal revenue

Supernormal profitSupernormal profit

Profit earned where average Profit earned where average revenue exceeds average revenue exceeds average costcost

Normal profitNormal profit

The level of profit needed to The level of profit needed to keep a firm in the market in keep a firm in the market in the long runthe long run

Where does the profit maxiWhere does the profit maximising firm operate at?mising firm operate at?

Bringing them all together Bringing them all together for the impact on firmsfor the impact on firms

Natural monopolyNatural monopoly

A market where long-run A market where long-run average costs are lowest average costs are lowest when output is produced by when output is produced by one firmone firm

Legal monopolyLegal monopoly

A market where a firm has a A market where a firm has a share of 25 per cent or moreshare of 25 per cent or more

Dominant monopolyDominant monopoly

A market where a firm has a A market where a firm has a 40 per cent or more share40 per cent or more share

Monopoly:Monopoly:

Monopoly Efficiency:Monopoly Efficiency:

Monopoly & Economic Monopoly & Economic Efficiency Efficiency

OligopolyOligopoly

A market structure A market structure dominated by a few large dominated by a few large firms firms

Oligopoly: Price Oligopoly: Price RigidityRigidity

Kinked demand curveKinked demand curve

A demand curve made up of twA demand curve made up of two parts: it suggests oligopolists o parts: it suggests oligopolists follow each others’ price redufollow each others’ price reductions, but not price risesctions, but not price rises

CartelCartel

A group of firms that produce A group of firms that produce separately but sell at one separately but sell at one agreed priceagreed price

Game theoryGame theory

A theory of how decision A theory of how decision makers are influenced by the makers are influenced by the actions and reactions of actions and reactions of othersothers

Monopolistic Monopolistic competitioncompetition

A market structure in which A market structure in which where there is a large where there is a large number of small firms selling number of small firms selling productproduct

Monopolistic Monopolistic Competition: Competition:

A Spectrum Markets:A Spectrum Markets:

Incumbent firmsIncumbent firms

Firms already in the marketFirms already in the market

Perfect Competition:Perfect Competition:

What efficiencies exist?What efficiencies exist?

How could this happen in How could this happen in the short run for the the short run for the

firm?firm?

How would this impact How would this impact the industry and the industry and

therefore therefore

Long Run:

Long Run:Long Run:

Short Run:Short Run:

Dynamic efficiencyDynamic efficiency

Efficiency in terms of Efficiency in terms of developing and introducing developing and introducing new production techniques new production techniques and new productsand new products

X inefficiencyX inefficiency

The difference between The difference between actual costs and attainable actual costs and attainable costscosts

Contestable marketContestable market

A market in which there are A market in which there are no barriers to entry and exit no barriers to entry and exit and the costs facing and the costs facing incumbent and new firms are incumbent and new firms are equalequal

Hit-and-run Hit-and-run competitioncompetition

Firms quickly entering a Firms quickly entering a market when there are market when there are supernormal profits and supernormal profits and leaving it when the profits leaving it when the profits disappeardisappear

Travel & Tourism: Travel & Tourism: Importance to the UK Importance to the UK

economy & contestable economy & contestable market market

What will be the impact of What will be the impact of the regulation introduced the regulation introduced into the football market?into the football market?

Regulation-What are the different Regulation-What are the different types of regulation the Government types of regulation the Government

can introduce into a market?  can introduce into a market? 

What is the objectives What is the objectives of firms?of firms?

What is the objective What is the objective of the manager?of the manager?

Why the objective of the Why the objective of the manager is different manager is different

from the firm?from the firm?

Ans:Ans: Because managers’ salaries are more often linked to tBecause managers’ salaries are more often linked to the growth of sales than to profit performance. High anhe growth of sales than to profit performance. High and expanding sales can also help to attract external finad expanding sales can also help to attract external finance and may result in greater economies of scale. To mnce and may result in greater economies of scale. To maximise sales revenue, a firm would continue to produaximise sales revenue, a firm would continue to produce more as long as extra output would increase revenuce more as long as extra output would increase revenue.e.

Sales revenue maximisatSales revenue maximisationion

The objective of achieving as The objective of achieving as high a total revenue possiblehigh a total revenue possible

Growth maximisationGrowth maximisation The objective of increasing The objective of increasing

the size of the firm as much the size of the firm as much as possibleas possible

Utility maximisationUtility maximisation The aim of trying to achieve The aim of trying to achieve

as much satisfaction as as much satisfaction as possiblepossible

Profit satisficingProfit satisficing Aiming for a satisfactory level Aiming for a satisfactory level

of profit rather than the of profit rather than the highest level of profit highest level of profit possiblepossible

stakeholdersstakeholders

People affected by the People affected by the activities of a firmactivities of a firm

Major employment Major employment regulations introduced since regulations introduced since

19971997