Report for Micro and Macro Theory and Application

Topics: Economics, Marginal cost, Costs Pages: 9 (982 words) Published: April 22, 2014
Report for Micro and Macro Theory and Application
Introduction
This is a report with lots of theory which referenced to the case--Sonny’s “move”, you can find the cost theory, the oligopoly market and other market structure theory, profit theory with lots of information relatively, and the author had given analysis about these theory. 1.0 Cost theory

1.0.1 Total cost
1.0.1.1 Definition
The total cost is the sum of fixed and variable costs.
Fixed costs: fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. You can see the fixed costs curve at 1-1. Variable costs: Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. You can see the variable costs curve at 1-1. The total costs equal to fixed costs plus variable costs.(TC=TFC+TVC) 1.0.1.2 Chart

Chart of Total Costs (1-1)
The total costs and total variable costs curve increased slowly in the first stage and increased fast in the second stage because that the more production the Sonny supplied, the more labor and the equipment will be needed, and the costs will increase faster. And because the fixed costs were consists of the fixed expenses, so the curve kept as a line. 1.0.2 Average cost

1.0.2.1 Definition
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced. It is also equal to the sum of average variable costs plus average fixed costs.(ATC=AFC+AVC) You can find the curve at 1-2.

1.0.2.2 Chart

Chart of average cost (1-2)
The diagram showed U-shaped, because of the diminishing marginal product--It is the property whereby the marginal product of an input declines as the quantity of the input increases. 1.0.3 Marginal cost

1.0.3.1 Definition
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit.(MC=change in total cost / change in quantity) You can find the curve at 1-3.

1.0.3.2 Chart

Chart of marginal cost (1-3)
The curve showed U-shape also because of diminishing marginal returns, As more and more workers are hired at a firm, each additional workers contributes less and less to production because the firm has a limited amount of equipment, additional workers have to share equipment and work in more crowded condition. 1.0.4 The relationship between TC, ATC and MC

ATC=TC/Q
MC=ΔTC/ΔQ
2.0 Oligopoly
2.0.1 Definition
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers. 2.0.2 Characteristics
First, fewer large (only two) suppliers.
Second, Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. Third, Oligopolies are price setters rather than price takers. Price are unlikely to change very often. Fourth, can earn super normal profits in the long run.

Fifth, it is difficult to predict the behavior.
2.0.3 Chart

Chart of oligopoly (1-4)
Above the kink, demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and the kink point. This is a theoretical model proposed in 1947, which has failed to receive conclusive evidence for support. 3.0 Perfect...
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