经济代写|微观经济学代写Microeconomics代考|BU1003

经济代写|微观经济学代写Microeconomics代考|The Implications of Economies of Scale

Imagine a firm which makes bricks. The firm’s existing plant has a maximum capacity of 100,000 bricks per week and the total costs are $€ 30,000$ per week. The average cost for each brick, assuming the plant operates at full capacity, is $€ 0.30$. The firm sets a price of $€ 0.40$ per brick giving it a profit margin of $€ 0.10$ per brick. If it sells all 100,000 bricks it produces each week, the total revenue per week will be $€ 40,000$.

Now imagine that in the long run the firm expands. It doubles the size of its plant. The total costs, obviously, increase – they are now using more land and putting up more buildings, as well as hiring extra labour and buying more equipment and raw materials. All this expansion will increase the total cost, but this doubling of capacity will not lead to a doubling of the cost.

Following this expansion, assume TC is now $€ 50,000$ per week. The expansion of the plant means that the firm can double its output so its capacity is now 200,000 bricks per week. The percentage increase in the total costs is less than the percentage increase in output. Total costs have risen by $€ 20,000$ or 66 per cent and total output by 100 per cent, which means that the average cost per brick is now $€ 0.25$.

The firm now faces two scenarios. In scenario 1 , the firm could maintain its price at $€ 0.40$ and increase its profit margin on each brick sold from $€ 0.10$ to $€ 0.15$. Assuming it sells all the bricks it produces, its revenue would increase to $€ 80,000$ per week. In scenario 2, the firm might choose to reduce its price to improve its competitiveness against its rivals. It could maintain its former profit margin of $€ 0.10$ and reduce the price to $€ 0.35$ improving the chances of increasing its competitiveness. In this case, if it sells all it produces, its revenue would be $€ 70,000$ per week.

What the firm chooses to do would be dependent on its competitive position. If it played a dominant role in the market, it might be able to increase its price and still sell all it produces. If it was in a more competitive market it might not have sold all its capacity in the first place, so being able to reduce its price might mean that it can now increase sales against its rivals and increase its total revenue.

Economies of scale, therefore, occur where the proportionate rise in output as a result of the expansion or growth of the firm, as defined by a rise in all the factor inputs, is greater that the proportionate rise in costs as a result of the expansion.

经济代写|微观经济学代写Microeconomics代考|A Simple Example of Profit Maximization

Let’s begin our analysis of the firm’s supply decision with the example in Table $5.6$ using the Grundy Family Dairy Farm. In the first column of the table is the number of litres of milk the farm produces. The second column shows the farm’s total revenue, which is $€ 0.40$ times the number of litres. The third column shows the farm’s total cost. Total cost includes fixed costs, which are $€ 200$ in this example, and variable costs, which depend on the quantity produced.

The fourth column shows the farm’s profit, which is computed by subtracting total cost from total revenue. If the farm produces nothing, it has a loss of $€ 200$. If it produces 1,000 litres, it has a profit of $€ 100$. If it produces 2,000 litres, it has a profit of $€ 300$ and so on. To maximize profit, the Grundy Farm chooses the quantity that makes profit as large as possible. In this example, profit is maximized when the farm produces 3,000 or 4,000 litres of milk, when the profit is $€ 400$.

There is another way to look at the Grundy Farm’s decision: the Grundy’s can find the profit-maximizing quantity by comparing the marginal revenue and marginal cost from each unit produced. The fifth and sixth columns in Table $5.6$ compute marginal revenue and marginal cost from the changes in total revenue and total cost, and the last column shows the change in profit for each additional litre produced. If the farm does not produce any milk, the fixed costs of $€ 200$ must be paid and so profit is $-€ 200$. The first 1,000 litres of milk the farm produces have a marginal revenue of $€ 0.40$ per litre and a marginal cost of $€ 0.10$ per litre; hence producing the additional 1,000 litres adds $€ 0.30$ per litre produced to profit, which means the farm now earns $€ 100$ in profit (from $-€ 200$ to $€ 100$ ). The second 1,000 litres produced has a marginal revenue of $€ 0.40$ per litre and a marginal cost of $€ 0.20$ per litre, so these additional 1,000 litres add $€ 0.20$ per litre to profit, which now totals $€ 300$.

微观经济学代考

经济代写|微观经济学代写Microeconomics代考|A Simple Example of Profit Maximization

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