By:   •  May 21, 2018  •  Research Paper  •  1,711 Words (7 Pages)  •  524 Views

Page 1 of 7

Content

1.Introduction        2

2.Cost Theory        2

2.1. average variable cost        3

2.2. average fixed cost        3

2.3. Average total cost        4

3.Market Structure        5

3.1.perfectly competitive        5

3.2. Monopoly        6

3.3.Differences between Perfect Competition and Monopoly        6

4.Profit Maximization        7

5.Alternative Theory        8

6.Conclusion        8

References        9

Report--Outcome 1 of Economic 1

李思阳 20165830

## 1.Introduction

The economic report is divided by four sections in order to show the characteristics and details more clear,and they are Cost Theory,Market Structure,Profit Maximization,Alternative Theory respectively.

[pic 1]

(Short Run)

## 2.1. average variable cost

The AVC curve plots the short-run average variable cost against the level of output and is typically drawn as U-shaped.At the beginning,the AVC will decrease as output increase and then reach to a lowest point which also called Technically Efficient Output ,this is because the division of labour and specialisation and it could bring a high efficiency.what’s more,the bulk purchasing and bulk discount also could reduce the cost of purchases,by which I mean,the variable cost declined but the quantity of output is remain unchanged then the average variable cost declines.However,after point C,as output increases AVC increases due to the Law of Diminishing Return.At a certain level of output,the advantages of specialisation would cease which means when more and more workers are hired the fixed size of factory will constrain the ability of extra workers to produce more and more,cause workers work in a more crowded condition and they have to share equipment which will result in a lower efficiency.

## 2.2. average fixed cost

This kind of cost curve is downward sloping and approach to a horizontal line.AFC decreases as the quantity of output increases,because fixed cost is remained same all the time but the output increases.

## 2.3. Average total cost

It’s clearly that the form of it is a U-shaped one which is the same as AVC.The difference is that the AC is very high in the initial stage due to the spreading effect which means fixed cost will be spread over a small number of unit as output is small.And then it decreases to the Technically Efficient Output point(shows in the diagram as point B) because of division of and specialisation which also lead to an efficient production.What’s more,bulking chasing and discount also diminishes the cost.When output exceeds the point,the Law of Diminishing Return sets in,more workers are hired which result in a lower efficiency due to limited fixed resources,because workers have to share equipment and work in a crowded condition so the curve increase.

In the long run, all costs of a firm are variable. The factors of production can be used in varying proportions to deal with an increased output. The firm having time-period long enough can build larger scale or type of plant to produce the anticipated output. The shape of the long run average cost curve is also U-shaped but is flatter that the short run curve as is illustrated in the following diagram:

[pic 2]

Long run average cost is equal to long run total costs divided by the level of output. The derivation of long run average costs is done from the short run average cost curves. In the short run, plant is fixed and each short run curve corresponds to a particular plant. The long run average costs curve is also called planning curve or envelope curve as it helps in making organizational plans for expanding production and achieving minimum cost.As output reach to a proper quantity the LAC arrive to a lowest point which is point Q,because of Economies of Scale which are obtainable by growing the firm,the average cost will fall.From point Q on,Diseconomies of Scale will apply and the average cost will rise as production increases.This means that the size of a business unit which produces output Q is the optimal size.The optimal size of a firm varies industry to industry.

## 3.1.perfectly competitive

[pic 3]

Perfect competition describes a competitive situation in which numerous sellers each provide an identical product.There is a large number of buyers and sellers of the commodity,so that no one firm can affect the market price through its own action,what’s more,every enterprise is price-taker and the price is determined by demand and supply in the marketplace.The most important condition for the theory of perfect competition is the freedom of entry and exit to the market for buyers and sellers which reflects there no barriers like government regulation or limited access to key resources.The demand curve of individual firm is a horizontal line which represents complete elasticity demand curve because an imperceptible change in price will create an infinite change in demand,since the firm can sell as much of this product on the market as it wants without affecting the price so the firm could control the quantity of output,when the quantity reach to a proper number(MR=MC)then it can realize profit maximization.In addition,When TR=TC which get to the break-even point the firm can earn economic profit in short run and it only can earn supernormal profit in short run due to this kind of market structure. What’s more,the average revenue is obtained by dividing the value of all the sales by the quantity sold,and marginal revenue denotes the revenue increase by selling one more unit of the product.A firm in perfect competition has the same selling price regardless how much it produces.Hence,average revenue should be the same as marginal revenue,which is equal to the price established in the market place for the industry(AR=TR/Q=P*Q/Q=P,MR=△TR/△Q=△(P*Q)/△Q=P)

## 3.2. Monopoly

A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market.Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit.

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