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Terms of production relationship

• total product (TP)– is the total quantity or total output, of a particular good produced.

• marginal product (MP)– is the extra output or added product associated with adding a unit of a variable resource in the production process.

• assume, labor – variable resource

MP = дельтаTP/дельтаQ (units of labor)

• average product (AP)– is output per unit of variable recourses.

• assume, labor – variable resource.

AP = TP /quantity of labor

• costs of production depend not only on the prices of needed resources but also on the quantities of resources needed to produce that output.


Law of diminishing returns (закон убывающей предельной производительности)

the law of diminishing marginal product: as successive units of a variable resource (say, labor) are added to a fixed resource (say, capital), beyond some point the extra, or marginal, product attributable to each additional unit of the variable resource will decline.




Tp, MP, AP

Phases of TP

1. Rises at increasing rate

2. Rises at a diminishing rate

3. After reaching max, it declines






1. TP rises at increasing rate – MP is rising

2. TP rises at a diminishing rate – MP is positive but falling

3. TP decline, MP – negative


MP intersect AP where AP is at a maximum.


Short-run production costs

• fixed costs (FC) постоянные издержки

• variable costs (VC) переменные издержки

• total costs (TC) общие, совокупные издержки

• average costs (AC) средние издержки

• marginal costs (MC)


• fixed costs (FC) are costs which in total do not vary with changes in output

FC must be paid even plant`s output is zero


• variable costs (VC) are costs that changes with the level of output


• total costs (TC) is the sum of FC and VC at each level of output


Average, or per-unit, costs

• AVC = FC /Q

•AVC = VC / Q

• ATC = TC / Q


• marginal costs (MC) is the extra, or additional, costs of producing 1 more unit of output

MC = дельта TC / дельта Q


Long- run production costs

• individual firms

- Can changes plant capacity

- Can build a larger plant or revert to a smaller one

- Can leave an industry

• yje long-run ATC curve is made up


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Могу бы получить 10 процентов дохода. Определить бугх эконом издержки, прибыль, следует ли продолжать



The costs of production.

Long-run production costs.

• individual firms.

- Can change plant capacity

- Can build a larger


Economies and diseconomies of scale

the long-run ATC curve is U-shaped

• so, for a time larger plant sizes will lead to lower unit costs, but beyond larger plant will mean larger ATC.



Economies of scale –explain the down – sloping art of the long – term ATC curve:

- A number of factors will for a time lead to lower average costs of production.

Economies of scale: factors

Labor specialization.

- Workers can work full time on those particular tasks for which they have special skills.

- Labor specialization eliminates the loss of time which accompanies each shift of a worker from one task to another.

Managerial specialization.

- Greater efficiency: large firms can use management specialists to best advantage;

- Lower unit costs: the production staff could be doubled with no increase in supervisory costs.

Efficient capital.

- Larger firms can afford the most efficient equipment, which is usually available in extremely expensive units.

- Effective use of this equipment demands a high volume of production.

Other factors.

- Many products entail design and development costs (and other “start-up” costs) which decline per unit as output is increased.

in time the expansion of a firm may lead to higher average total costs.

• difficulty of efficiently controlling and coordinating a firm`s operations as it becomes a larger-scale producer.

• problems of communication and cooperation, bureaucracy.

• workers may feel alienated from their employers and care about working efficiently.

Constant returns to scale

- Range of output between the output at which economies of scale and the output at which diseconomies of scale begin.

- Over this period long-run average costs don`t change.

Market models

Pure competition

Pure monopoly

differ to:

- The number of firms in the industry

- Product produced

- How firms enters the industry

• pure competition; совершенная конкуренция

• imperfect competition: несовершенная конкуренция

- pure monopoly

- oligopoly

-monopolistic competition

Pure competitive

• involves a very large numbers of firms

• firms produce standardized product

•firms can enter the industry very easily


price takers- individual firms exert no significant control over product price.

• each firm produced such a small fraction of total output that it will not influence total supply or product price.


Pure monopoly

• one firm is the sole seller of product/service

• entry of additional firms is blocked

• produces a unique product

price-maker – the firm exercises considerable control over price because it is responsible for the total quantity supplied.



• only a few sellers

• each firm is affected by the decisions into account in determining its own price and output

Monopolistic competition

relatively large number of sellers

• produce differentiated product

• entry to the industries is quit easy

Pure competition: characteristics

1. Very large numbersof independently acting sellers. Each firm produces a small fraction of total output.

2. Standardized product.If the price is the same, consumers will be indifferent about which seller to buy the product from.

3. Price takers. Individual firms exert no significant control over product price.

4. Free entry. No significant obstacles – legal, technological, financial, or other – prohibit new firms from forming and selling their output.


Монопольные объединения.

Ценовая и неценовая конкуренция.

С точки зрения перспективы развития бизнеса надо оценить (или Россия, или Мир) отдельную отрасль, организационно-правовую форму, инструменты конкурентной борьбы.



Pure competition: demand

• if a single producer increases or decreases output, and the output of all other competing firms are constant, the effect on total supply and price is negligible.

• thus, the demand faced the individual firm in a pure competitive economy is perfectly elastic.


- an entire industry – all firms – can affect price by changing industry output.

- So, the market demand is not perfectly elastic.

Pure competition: revenue

• Total revenue (TR)

• Average revenue (AR)

• Marginal revenue (MR)


The total revenue (TR) for each sales level can be determinate by multiplying price by the quantity the firm can sell.

TR = P*Q

Average revenue (AR) is revenue per unit.


marginal revenue (MR) is the extra revenue, which results from selling 1 more unit of output.

MR = дельта TR / дельта Q

under purely competitive conditions, product price is constant to the individual firm.

• added units of output can be sold without lowering product price – additional units can be sold at the constant price

AR = P = MR





Because a purely competitive firm can sell additional unit at the market price, its MR coincides with its demand. Because price is constant, TR depends on the level of output.

Profit-maximization: approaches

There are 2 ways to determine the level of output at which a competitive firm will realize maximum profit:

- To compare TR and TC

- To compare MR and MC

TR-TC approach (short-run)





Q1, Q3 – break – even points (TR=TC) – all costs are covered by revenues, but there is no economic profit.

Q3 – the profit maximizing output – where the vertical distance between TR and TC is the greatest

MR-MC approach (short-run)






Short-run supply



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