⽆边界课堂 个⼈中⼼

 返回前⼀⻚

9.1 Producer theory - ASP  分享

2024-05-11 21:12 6 次学习

有效期⾄：2024-05-17 13:00 

9.1 Producer theory

• survival rule
- short run
A sunk cost is a cost that has already been incurred and is
nonrecoverable. To decide whether or not to shutdown in
the short run, a firm should consider its variable costs only,
since its fixed costs are sunk. Consider the following two
circumstances : if firm shuts down, it can eliminate all
variable costs, but it must still pay fixed cost. Firm’s profit
= 0 - FC = -FC ; if firm stays in business, firm’s profit = TR
- TVC - FC. Thus, as long as TR > TVC (AR > AVC), it is
better for firm to stay in business.

According to the diagram, at profit-maximisation level of

output Q2, price is lower than AVC. Firm should shut down
immediately.

- long run
In the long run, all costs are variable costs, there are no
sunk fixed costs. In this case, a firm will stay in the market
only if she can cover all costs and make at least normal
profit. If TR < TC (AR < AC), firm should shut down.

If market price is lower than P1, firm should shut down

immediately; if market price is between P1 and P2, firm
could operate in the short run, but not in the long run. If
market price is higher than P2, there is no need for firm to
leave the industry.

• profit maximization
For the operating firm, when MR > MC, it is advantageous
for the firm to increase output as each unit produced and
sold brings in more revenue than it costs to produce and
hence adds to overall profit. However, if MR < MC, the last
unit is making a marginal loss, firm should decrease the
output. Consequently, the firm will maximise profit at the
output where MR=MC.

• limitations of theory
- difficult to estimate MR and MC
To predict MR for each level of output, firm needs to have
precise knowledge of the price elasticity of demand for its
product. If the firm is not able to obtain this information,
then the profit-maximisation level of output may be
inaccurate. In addition, the theoretical model assumes a
known, unchanging cost and revenue structure. In reality,
costs and revenues do fluctuate over time, the firm cannot
be sure if their current output and price is actually profit-
maximising.

- subnormal profit
It is possible that firm is producing at profit maximization
output but couldn’t earn supernormal profits. In the long
run, the price should cover AC for firm to stay in the
business.

According to the diagram, profit-maximisation level of

output is Q2. At this point, price is P1, which is lower than
AC, firm is making subnormal profit. So Q2 is also known
as loss-minimisation level of output. For this firm, the only
way to earn abnormal profit is to practice price
discrimination, otherwise it should shut down in the long
run.

- government regulation
The firm may be subject to government regulation such as
profit-capping. Most local utilities like electricity, natural
gas, and so on are covered by price regulation that limits
the prices they can charge.

• other objectives
- profit satisficing
Profit satisficing occurs when a firm seeks to make a
reasonable or minimum level of profit, sufficient to satisfy
the shareholders but also to keep the stakeholders happy,
such as the workforce and consumers. The firm is seen as
a set of interest groups, each with its own objectives,
which may change over time. Workers will expect pay rises
and improvements in working conditions which may raise
costs. Consumers may expect to see prices falling,
particularly if there are rival producers. This is a long way
from the simple profit-maximising theory as firms may
choose to sacrifice some potential short-term profits to
satisfy these expectations.

- sales maximization
With sales maximisation, the firm would increase output up
to the break-even output where the total revenue just
covered the total cost. A higher output than this implies
loss-making behaviour. Growth maximisation may come at
the expense of lower profits. For example, starting a price
war can lead to lower profits but enable higher sales.
However, increasing market share can be a way to increase
profits in the long-term, if a firm successfully drives
competitors out of the market.

- revenue maximization
Revenue maximisation is an alternative theory of a firm’s
behaviour, related to the principal–agent problem. The
separation of management from ownership, especially in
large firms, can result in a firm’s objective changing. Senior
managers tend to be more interested in increasing sales
and maximising revenue from sales. Managerial salaries
and bonuses are usually based on total revenue, not profits.
Sales can be easily and regularly monitored; in principle,
production will continue to the point where MR = 0.

At Q1, firm could maximise profit.

At Q2, AR is higher than AC, profit-satisficing is achieved.
At Q3, MR=0, firm could maximise sales revenue.
At Q4, AC=AR, firm could maximise sales, subject to
normal profit.

- survival
In some situations, firms may have a short-term objective
of survival. This involves minimising losses. This is most
likely to be where a firm is facing serious unexpected
external threats such as the loss of its best customer or a
downturn in the economy due to some external shock like
the COVID-19 pandemic. Survival in such circumstances
becomes a priority in order to allow the firm to develop a
revised strategy to stay in business.

• entry barrier
- legal barrier
In some countries, it may be impossible for new firms to
enter an industry because the economic activity is state-
owned or the good is produced under licence from the
government. The production process or products of a firm
may also be protected by a legal monopoly in the form of a
patent, whereby competitors cannot copy a product without
the permission of the owner.

- market barrier
Advertising and brand names with a high degree of
consumer loyalty may prove a difficult obstacle to
overcome. Existing firms can make entry for new firms
more difficult where a firm saturates the market with lots of
brands, giving its consumers what appears to be a wide
range of choice. Branding gives the firm greater market
power because consumers do not see the rival firm’s
product as a close substitute on account of extensive
advertising. Collaboration between existing producers to
develop new products may act as a barrier in that the
resources necessary to compete are beyond the means of
single new producers.

- cost barrier
The high fixed cost or setup cost may deter potential
entrants. The barrier here is access to capital. Only very
large firms will be able to fund the necessary investment.
Research and development costs will represent a high
proportion of total costs. High sales over a long period of
time are needed before the firm is profitable.

Economies of scale can be a barrier because existing large

producers are able to produce at a lower average cost than
those just starting up. Economies of scale give large firms
an opportunity to cut their price in order to eliminate any
high-cost producers.

- physical barrier
Some firms may have monopoly access to raw materials,
components or retail outlets, which will make it difficult for
new entrants to make an impact. Vertically-integrated
manufacturing businesses, where a firm is a specialist in
different stages of production, will be protected by the fact
that their rivals’ costs will be higher.

• contestable market
A contestable market is any market structure where there is
a threat that potential entrants are free and able to enter
the market to compete for profit. The determinant of a
market’s contestability are its barriers to entry and exit. A
market is said to be perfectly contestable where there are
no barriers to entry so there is a threat of entry from
potential competitors.

Firms in a perfectly contestable market will not produce at

the profit maximization level of output Q1, where MC = MR.
This is because the large abnormal profits will increase the
threat of new entry into the market so that the level of
abnormal profit will fall for the incumbent firm. Therefore,
firms might set prices relatively close to average costs to
prevent this from happening. When price is P2, AC = AR,
the incentive for new entry is taken away as only normal
profits are made. Therefore, it could be argued that
competition and contestability lead to lower prices and
higher consumer surplus.

Competition and contestability also encourage an efficient

use of resources. The low prices help to increase allocative
efficiency because prices will be close to marginal cost. A
contestable market may also be more X efficient. The
threat of competition means firms have more incentives to
cut costs and remain efficient. Otherwise, they will become
unprofitable. For example, in a monopolist may have low
incentives to be efficient and have no incentives to cut
costs – leading to X inefficiency. In a contestable market
this will not happen. In addition, with low entry barriers,
innovative and more efficient firms could enter the industry
and drive out the less efficient incumbent firms who are
unable to compete. This benefits consumers as they could
see regular price reductions due to the efficiency gains.

However, as firms are producing at normal profit, they

don’t have supernormal profits required to reinvest back
into the company. Technology advances could raise the
quality of products and reduce the prices. Better
technology could also allow firms to reduce costs of
production and become more profitable over time. As
dynamic efficiency is less likely to be achieved, consumers
and firms both lose out in the long run.

• how firms grow in size

- internal growth
A firm decides to retain some of the profit rather than pay
it out to the owners. It is put back into the business in the
form of new investment in order to increase the productive
capacity. This is most likely to occur in capital-intensive
activities where the market is expanding.

- external growth
Horizontal integration is a process or strategy used by
firms to strengthen their position in an industry. It involves
the merger or acquisition of a business that is in the same
sector of an industry.

Vertical integration occurs when a firm grows by moving

into a forward or backward stage of its production process
or supply chain, such as a manufacturer moving into retail
(forward) or taking control over some of its supplies
(backward).

The external growth of a conglomerate differs from the two

forms of integration in so far as growth comes from the
purchase of unrelated businesses. The rationale is to
spread risk. Each of the companies in a conglomerate is
independent with its own board of directors.

- diversification
Another common way in which firms grow is through
diversification. This is where a firm produces or sells a
range of different products. The reasons behind this tend to
be to spread risk or to exploit an opportunity in the market.

• economies of scale
Economies of scale occur when average costs decrease as
the firm increases its output by increasing its size or scale
of operations. They can therefore only accrue to a firm in
the long run.

- Technical economies
Technical economies refer to the advantages gained
directly in the production process through more efficient
production methods. Some production techniques only
become viable beyond a certain level of output.

- Purchasing economies
As firms increase in scale, they increase their purchasing
power with suppliers. Through bulk buying, they are able to
purchase inputs more cheaply, so reducing average costs.

- Marketing economies
Large-scale firms are able to promote their products and
pay lower rates for advertising on television, in newspapers
and on social media because they are able to purchase
large amounts of air time and space.

- Managerial economies
In large-scale firms, managerial economies come about as
a result of specialisation. Experts can be hired to manage
operations, finance, human resources, sales, IT systems
and so on. For small firms, these functions often have to be
carried out by a multi-task manager.

- Financial economies
Large-scale firms usually have better and cheaper access
to borrowed funds than smaller firms. This is because the
perceived risk to the lender is lower.

• benefits of large firms

- economies of scale
See above

- dynamic efficiency
See monopoly

- bigger market
Large firm could achieve a bigger market share to boost
sales revenue and profits. This is sometimes referred to as
the monopoly motive, but it could be a defensive strategy
to maintain market share in anticipation of action by rivals.
In the global economy, there is a strong argument that only
big firms can compete in markets where multinationals are
present.

- economies of scope
A multi-product firm has the advantage of being able to
spread business risks. If one branch of its activity is
stagnating or going into decline, there will still be the
revenue from others to keep the firm afloat. Firms often
see new business opportunities in related areas. This is at
the heart of successful entrepreneurship. Sometimes large
firms can use the same production facilities, so keeping the
costs down.

• Diseconomies of scale
A firm can expand its scale of output too much, with the
result that average costs start to rise; efficiency is
therefore compromised. This is indicative of diseconomies
of scale. The most likely source of diseconomies of scale
lies in the problems of management co-ordination of large
complex organisations and the effect that size and poor
communications have on the morale of the workforce.

Another example of diseconomies of scale is where

workers may feel a lack of motivation due to the repetitive
nature of the work they are carrying out. Workers might
also feel that they are just a small insignificant part of a big
organisation where senior managers do not appear to have
a duty of care to employees.

• why firms remain small

- niche market
A small firm could concentrate on niche markets. Small
niche markets may have less competition and therefore be
more profitable. Moving into a mass market may make
competition more intense. Niche markets such as
handmade products can have a more price inelastic
demand. Therefore, firms can charge a bigger markup on
the marginal cost of production, this enables the firm to be
more profitable, despite lower volume.

- low MES
For some industries, economies of scale are insignificant,
the minimum efficient scale level of output is very low. In
this case, if the firm grows in size, they will experience
diseconomies of scale so average cost will rise. Thus, firm
must remain small to produce at a lower cost. On the other
hand, if the product is a service, the firm will be small in
order to offer the customers personal attention for which
they will pay a higher price.

- objectives
some owners may prefer a business that is manageable
and easy to retain control. Many small firms are not listed
on the stock market but are privately owned, they have
greater freedom to choose whatever objective they wish.
This may be to continue family ownership and run the
business in a traditional way. For example, a bookseller may
concentrate on physical bookshops rather than move into
e-books because it feels traditional books have more value
than e-books, even if it is not as profitable. This could also
avoid the principal-agent problem, if managers and
shareholders have different aims.

评论 查看更多

发评论，抢沙发～

店铺主⻚ 个⼈中⼼ 关注我们 店铺信息 投诉建议

说点什么吧～
课程⽬录