NJC 2025 SH1 H2 Econ Ch4A Seminar Notes (Final)

CHAPTER 4A (H2 only) OVERVIEW ................................................................................................................................................................... 1 1. FIRM, PLANT AND INDUSTRY ........................................................................................................................... 2 2. TRADITIONAL OBJECTIVE OF FIRMS: PROFIT MAXIMISATION............................................................ 2 2.1 TOTAL REVENUE, TOTAL COSTS AND PROFIT .................................................................................... 3 2.2 ACCOUNTING PROFIT AND ECONOMIC PROFIT .................................................................................. 3 2.3 PROFIT MAXIMISATION AND THE MARGINALIST PRINCIPLE ...................................................... 6 3. COSTS OF PRODUCTION IN THE SHORT RUN .............................................................................................. 7 3.1 FIXED AND VARIABLE COSTS AND THE SHORT RUN ........................................................................ 7 3.2 SHORT RUN COSTS ........................................................................................................................................ 9 3.2.1 TOTAL FIXED COSTS, TOTAL VARIABLE COSTS AND TOTAL COST ................................... 9 3.2.2 AVERAGE FIXED COST, AVERAGE VARIABLE COST AND AVERAGE COST ..................... 10 3.2.3 MARGINAL COST (MC) .................................................................................................................... 11 3.2.4 ILLUSTRATION OF COSTS IN A DIAGRAM ................................................................................ 11 4. COSTS OF PRODUCTION IN THE LONG RUN.............................................................................................. 15 4.1 FROM THE SHORT RUN TO THE LONG RUN AVERAGE (LRAC) CURVE .................................... 17 4.2 ECONOMIES AND DISECONOMIES OF SCALE ..................................................................................... 20 4.2.1 INTERNAL ECONOMIES AND DISECONOMIES OF SCALE ................................................... 21 4.2.2 EXTERNAL ECONOMIES AND DISECONOMIES OF SCALE ................................................... 28 5. ALTERNATIVE OBJECTIVES OF FIRMS ........................................................................................................ 32 6. ANNEX………………………………………………………………………………………………………………………………... 36 Firms and Firms and Decisions : Objectives of Firms and Costs of Production

2025 SH1 H2 Economics Chapter 4A National Junior College: Economics Department H2 Economics (9570) 1 OVERVIEW OF CHAPTER To economists, production is the transformation of inputs into outputs that yield satisfaction directly to the consumers. The transforming agent is the firm as it produces and supplies goods and services to consumers. As the firm has limited resources and cannot produce everything, it has to choose the type of goods and services to produce. The firm must also decide how to produce these goods and services. It has to decide the factor combinations (e.g. more labour and less capital, or less labour and more capital) to be used in the production process. For a self-interested (assuming profit motivated) firm, it will obviously want to use the least cost combination of factors to produce a given level of output i.e. to achieve productive efficiency. When a firm wishes to produce more, it has to increase the quantity of factor inputs. However, by purchasing more factor inputs, the total costs of production of the firm will rise. In addition, when the firm offers more for sale, the price would also have to fall, thus affecting its revenue. All these will affect the firm’s profit and thus its production decision. As a result, a sound knowledge of a firm's production behaviour and cost of production in Chapter 4 A sets the groundwork for the study o f Spectrum of Market Structures (Chapter 4B) – which considers how a firm's price and output decisions are affected by the characteristics of the market structure and market conditions within which it operates , and the strategies firms (the firm and its competitors) can adopt. KEY DECISIONS RELATED TO THIS CHAPTER ✴ A f irms’ price and output decisions based on the marginalist principle, maximising profit when marginal revenue equals marginal costs, and on the estimated demand for its good or service. ✴ A firm’s decision with regard to its scale of production or size and growth of the firm. ✴ A firm’s decision with regard to the objectives it wants to pursue in the short run and in the long run.

2025 SH1 H2 Economics Chapter 4A National Junior College: Economics Department H2 Economics (9570) 2 KEY ECONOMIC AGENTS ✴ Producers (Firms) ✴ Consumers 1. FIRM, PLANT AND INDUSTRY It is important to distinguish between some of the terms that will be used in this chapter. 2. TRADITIONAL OBJECTIVE OF FIRMS: PROFIT MAXIMISATION In Chapter 2A, we assumed th e supply curve is upward sloping: that a higher price will encourage firms to offer more for sale. But just how much will firms choose to supply at each price? It depends largely on the amount of profit they will make. If a firm can increase its profit by producing more, it will normally do so. DEFINITION S: A Firm is a business organisation that hires factors of production, combines them in a productive process to create and sell the resulting output for a profit. A Plant (or factory) refers to the geographical location where the actual production is carried out. A firm may own one or several production plants. An Industry refers to a group of firms producing similar goods or services. Firms within the same industry are usually competitors in the same market. Learning Objectives ✴ Define and derive total revenue, total costs and profit. ✴ Distinguish between implicit and explicit costs. ✴ Distinguish between accounting profit and economic profit. ✴ Using the marginalist principle to explain how firms make price and output decisions in order to maximise profits.

2025 SH1 H2 Economics Chapter 4A National Junior College: Economics Department H2 Economics (9570) 3 Economists typically assume that the objective of any firm is to maximise profit. Profit maximisation can be defined as striving for the highest profit. To determine the profit maximising output, we need to know the concepts of revenue, costs and profit. 2.1 TOTAL REVENUE, TOTAL COSTS AND PROFIT 2.2 ACCOUNTING PROFIT AND ECONOMIC PROFIT The total costs of production to the economist are technically the opportunity costs of using the resources in the production of a product – a measure of the sacrifice involved in using factors of production to produce that product. This definition is based on the fact that resources are scarce and they have alternative uses. To produce a product, scarce resources must be diverted from other productive activities. To use them in one process is to deny their use in other processes. The costs may be DEFINITION S & FORMULAS : Total Revenue (TR) of a firm is the firm’s total earnings from the sale of its output for a specific period of time. TR = P x Q Total revenue is calculated as the price (P) multiplied by the number of units sold (Q). Total Costs (TC) of production to the economist are technically the opportunity costs of using all the resources in the production of a product. Total costs are calculated as the sum of explicit costs and implicit costs. TC = Explicit Costs + Implicit Costs Profit (π) is the difference between total revenue (TR) and total costs (TC) of production. Profit (π) = TR – TC

2025 SH1 H2 Economics Chapte