SUPPLY MBA NCCU Managerial Economics Lecturer: Jack Wu
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
SUPPLYMBA NCCU
Managerial Economics
Lecturer: Jack Wu
CASE:DRAM INDUSTRY, 1996-98
Prices falling sharply: Fujitsu closed Durham, UK, factory but
continued production at Gresham, OR Texas Instruments sold Richardson TX, Italy,
and Singapore plants to Micron TI shut Midland, TX plant
QUESTION
Question: explain differences in strategic decisions:
why did Fujitsu close Durham? why did it continue with Gresham?
Question: Why did Micron buy some TI plants?
BUSINESS RESPONSE TO PRICE CHANGES
If market price falls, should business reduce production or shut down?
Correct managerial decision depends on time horizon – which inputs can be adjusted.
Focus on short run, then later consider long run;
distinction between short/long run on supply side similar to that on demand side
ADJUSTMENT TIME
short run: time horizon within which seller cannot adjust at least one input
long run: time horizon long enough for seller to adjust all inputs
SHORT-RUN COST
Analyze total cost into two categories fixed cost – do not vary with production scale variable cost – does vary marginal cost = increase in total cost for
production of additional unit average (unit) cost = total cost / production
rate
Production Rent Wages Supplies Total0 $2000 $200 $0 $2200
1000 $2000 $529 $100 $26292000 $2000 $836 $200 $30363000 $2000 $1216 $300 $35164000 $2000 $1697 $400 $40975000 $2000 $2293 $500 $47936000 $2000 $3015 $600 $56157000 $2000 $3870 $700 $65708000 $2000 $4862 $800 $76629000 $2000 $5996 $900 $8896
SHORT-RUN WEEKLY EXPENSES
Production FC VC TC MC AFC AVC AC0 $2200 $0 $2200
1000 $2200 $429 $2629 $0.43 $2.2 $0.43 $2.632000 $2200 $836 $3036 $0.41 $1.1 $0.42 $1.523000 $2200 $1316 $3516 $0.48 $0.73 $0.44 $1.174000 $2200 $1897 $4097 $0.58 $0.55 $0.47 $1.025000 $2200 $2593 $4793 $0.7 $0.44 $0.52 $0.966000 $2200 $3415 $5615 $0.82 $0.37 $0.57 $0.947000 $2200 $4370 $6570 $0.95 $0.31 $0.62 $0.948000 $2200 $5462 $7662 $1.09 $0.28 $0.68 $0.969000 $2200 $6696 $8896 $1.23 $0.24 $0.74 $0.99
ANALYSIS OF SHORT-RUN COSTS
COMMON MISCONCEPTION
Capital expenditure = fixed cost Labor = variable cost Example: US: workers employed “at will”. Western Europe: strong worker protection
laws Japan: guaranteed lifetime employment Current: temporary workers
0
2
4
6
8
2 4 6 8
total cost
variable cost
fixed cost
Cost
(Thousa
nd $
)
Production rate (Thousand dozens a week)
SHORT-RUN TOTAL COST
DIMINISHING MARGINAL PRODUCT
Marginal product: increase in output from additional unit of input
Diminishing marginal product: marginal product reduces with each additional unit of input
0
50
100
150
200
2 4 6 8
Cost
(C
ents
per
doze
n)
Production rate (Thousand dozens a week)
250
300
marginal cost
average cost
average variable cost
SHORT-RUN MARGINAL, AVERAGE VARIABLE, AND AVERAGE COSTS
diminishing marginal product causes marginal and average cost curves to rise
MARGINAL REVENUE
Total revenue = price x sales quantity. Marginal revenue: change in total revenue
from selling additional unit May be positive or negative If price is fixed, then marginal revenue is equal
to price
Prodn VC TC TR Profit MC MR0 $0 $2200 $0 -$2,200
1000 $429 $2629 $700 -$1,929 $0.43 $0.72000 $836 $3036 $1400 -$1,636 $0.41 $0.73000 $1316 $3516 $2100 -$1,416 $0.48 $0.74000 $1897 $4097 $2800 -$1,297 $0.58 $0.75000 $2593 $4793 $3500 -$1,293 $0.7 $0.76000 $3415 $5615 $4200 -$1,415 $0.82 $0.77000 $4370 $6570 $4900 -$1,670 $0.95 $0.78000 $5462 $7662 $5600 -$2,062 $1.09 $0.79000 $6696 $8896 $6300 -$2,596 $1.23 $0.7
SHORT-RUN PROFIT, I
0
3.5
4.793
1 5 9
total cost
total revenue
variable cost
loss =$1293
Production rate (Thousand dozens a week)
Cost
/revenue (
Thousa
nd $
)SHORT-RUN PROFIT, II
Two key business decisions:•whether to continue in
operation •scale of operation
SHORT-RUN DECISIONS
70
5
marginal cost
average costaverage variable cost
marginal revenue = price
Production rate (Thousand dozens a week)
Cost
/revenue (
Cents
per
doze
n)
break-even price
SHORT-RUN PRODUCTION
produce where marginal cost = price
SHORT RUN BREAKEVEN I
produce if total revenue >= variable cost, or price >= average variable cost
SHORT RUN BREAKEVEN II Sunk cost: cost that has been committed and
cannot be avoided. sunk costs should be ignored in making a current
decision assume, for competitive markets analysis, fixed
cost = sunk cost hence, a business should continue in production
so long as its revenue covers variable cost (i.e. shut down if losses are greater than fixed cost)
or equivalently, so long as price covers average variable cost.
SHORT-RUN SUPPLY CURVE
individual seller’s supply curve: that part of the marginal cost curve above minimum average variable cost;
minimum average variable cost -- short-run breakeven level.
SHORT-RUN INDIVIDUAL SUPPLY: INPUT DEMAND
Change in input price shift in marginal cost change in profit-
maximing production
LONG-RUN DECISIONS
whether to enter/exit price >= average cost
scale of operation where marginal cost = price
LONG-RUN PRODUCTION
FUJITSU
Durham, UK: long-run price < average cost (including cost of refitting)
Gresham, OR: average variable cost < short-run price < average cost
WHY DID MICRON BUY TI PLANTS? different views of long-run DRAM price Micron could achieve greater scale
economies
Why didn’t Micron buy all of TI’s plants? Possible explanation:
Micron Electronics bought TI plants -- Singapore, Italy, Richardson TX -- with lower average cost
TI closed plants with higher average cost -- Midland TX -- Micron didn’t wish to buy
Graph of quantity that seller will supply at every possible price• follows marginal cost curve• slopes upward -- increasing marginal cost of production (or decreasing marginal return to inputs)
INDIVIDUAL SUPPLY
• For every possible price, it shows the production/ delivery rate
• For each unit of item, it shows the minimum price that the seller is willing to accept
SUPPLY CURVE: TWO VIEWS
MARKET SUPPLY, I
Graph of quantity that seller will supply at every possible price horizontal sum of individual supply curves
MARKET SUPPLY
MARKET SUPPLY, II
lowest cost seller defines starting point
gradually, blends in higher-cost sellers
slopes upward
LONG-RUN SUPPLY
long run -- freedom of entry and exit if a business earns profits
attract new entrants increase market supply reduce market price
if business making loss, will exit
LONG-RUN SUPPLY CURVE
slope of long-run supply gentler than short-run supplymay be flat
SELLER SURPLUS
Individual seller surplus = revenue a seller gets from a product - production cost
Market seller surplus = sum of individual seller surpluses
0
43
70
1 5
bc
a
d
marginal cost
marginal revenue= price
individual seller surplus
Production rate (Thousand dozens a week)
Cost
/revenue (
Cents
per
doze
n)
d
INDIVIDUAL SELLER SURPLUS
BULK ORDER
use bulk order to extract seller surplus Sellers use package deals, two-part
tariffs to extract buyer surplus; buyer can apply symmetric concept --
how to get most out of seller; use bulk purchasing to capture all seller
surplus -- Speedy should offer Luna a lump sum equal to area 0abd plus $1 of seller surplus to supply a bulk order of 5000 dozen eggs
PROFIT/PRICE VARIATION: LIHIR GOLD IPO, OCT. 1995 Projected profit in 1999:
$52m if gold price = $400 per ounce $76m if gold price = $450 per ounce
Why would a 12.5% increase in gold price raise profit by 46%?
Item Horizon Price Elasticitydistillate short run 1.57gasoline short run 1.61pork long run 0.23tobacco long run 7housing long run 1.6 - 3.7
PRICE ELASTICITIES
FORECASTING
Forecasting quantity supplied Change in quantity supplied = price elasticity of
supply x change in price
Related Documents
