Definition Economics

STUDENTS: Good morning, teacher. Yes, I know what’s coming! To come for many modules, you give me a lecture on “Microeconomics”!
And I also know that “Macroeconomics is the study of the workings of the economy in general,” because you have me lectures about that one before. She also told me before, “Microeconomics is the part of the economy on the activities of the individual markets and companies.”

TEACHER:. Good for you. I see you remember my earlier conference on the economy very well.

STUDENT: Yes, and I also remember you asking “why should I, as a businessman, his interest in the macro economy”? Now I’ll ask you this … why should I, as a businessman, his interest in microeconomics?

PROFESSOR: Just because the economy is very relevant when a businessman is to make the environment in which he or she works to understand. An ability to help, the company can succeed, of course.

STUDENT: You mean that a good entrepreneur, I need to be a good economist?

TEACHER: Not exactly. A deep knowledge of the economy is neither necessary nor sufficient to be successful in business. However, a good foundation in business will help you in analyzing business situations much better. Now let me ask you something? Do you know what kind of economy is?

STUDENT: I ??do not remember such a thing as “the dismal science.”

PROFESSOR: It was long ago, when Malthus was very negative predictions about what would happen as the population grew faster than food production. No, that was the answer I had expected “the economy is a social science or behavioral problems is.” And that’s because the economy is focused on the behavior of people in different situations. Also, you know, was Malthus, does not it?

STUDENTS: Thomas Robert Malthus (1766-1834) was an English economist, sociologist, member of the clergy and a pioneer in the study of modern populations. Malthus argued that poverty and distress were inevitable because the population if not checked, increased faster than the availability of means of livelihood.
And back to your definition of the economy, what that means, what do economists to theorize about the behavior. Is that all?
TEACHERS: After congratulating you on your encyclopedic knowledge, let me tell you that the economy is a social science to the behavior of the economy, more precisely, the behavior of economic agents, which is after all attempts to explain to people. Of course, because the economy is not an exact science, economists are developing theories that are sometimes called models.

Student: And why and when these models are useful, a business owner?

TEACHER: The economic models are simplifications of the real world. It can be useful to explain how the world works. Of course, the ultimate test of how well the economy is the company … t really explain or predict exactly what the real world?

STUDENTS: Fine. And that’s the issue that we discuss in this first module of microeconomics?

TEACHER: We are some of the key issues that are of interest to economists and businessmen to describe. Later, you and I will discuss in detail.

To begin, let me say that all commercial enterprises operating in a market. Will you try to define a market?

STUDENT: Of course. A market is the environment to interact with the providers and seekers of a product or a service. And let me add that this interaction that determines what is produced and consumed and in what quantities.

TEACHERS: A very good “economic” definition. Of course, you say that this “determination of what is produced and consumed and how much” is through the price mechanism, the result of the interaction of buyers and sellers on the market.

STUDENT: Of course. And I can say is that, why should everyone a very firm understanding of the markets in which it operates and they have. But I have a question. Do all the activities of a company actually gets under way in a market?

TEACHER: Not necessarily. A key issue for managers, all the time question is: Should we X activity within an enterprise, or should we buy it on the market of another company? In other words … we should do or buy?

Student: So, is an activity in a company as an alternative to a market transaction.

TEACHER: Exactly. While companies are still operating in some markets, they also lead internal processes, and business leaders of the main problems is to decide which transactions within the company and those who should be left to market.

Student: I see, and it seems that lately there has been a strong tendency to “Agriculture” features have been.

PROFESSOR: Yes. Administrative tasks in manufacturing, more and more functions on the market charge. EDS and IBM, have increased their support for the activities of these companies and agriculture to industry to “pay producers’ increased significantly.

The Theory of the Firm

But let me expand on markets, and not to mention “the theory of the firm.” When we discuss how markets work, we focus primarily sold on the pricing and the quantity of certain products.

* The theory of the firm is used to examine the supply decisions of firms.
* The theory of consumer demand will help us predictions about how to create the demand in response to changes in key economic variables such as product price and consumer incomes change.

The economy of the company

While decisions in a large economy of a large number of participants, many individuals, one of the most important economic decision-making unit of the company’s business. Can you imagine why that is?

STUDENT: Well, this is the company’s business in an economic actor, the workers, the purchase of inputs, hired, manufactures and markets products on the market. Of course, a company can be in different ways from a legal perspective, sole proprietorships, partnerships, companies, etc. organized

PROFESSOR: Yes, but from an economic point of view is an entity in itself that is conceptually distinct from its owners and workers.

Student: And what is the conceptual difference between “business” of speech, and others such as “Business,” “Company,” “Company,” “Company”, etc?

TEACHER: In theory there is absolutely no difference to the broad definition as described above. When I “farm” the word that I will relate this broad definition. Of course, sometimes I will refer to certain types of companies, because in fact are important legal differences (but not economic) between a corporation and a partnership, for example.

Now allow me to discuss …

The elementary theory of the firm

We call it the elementary theory of the firm, because it simplify the “model”, we discuss a single product company, usually the product is believed to be produced.

STUDENT: Is not this an oversimplification?

TEACHER: No, to be applied, as can the principles for any business. What every company should as a rule for the production of a product?

Student: I am sure that the needs of plants and equipment and workers, equipment and ancillary activities are operated. It must also purchase inputs such as components, raw materials, energy, etc.

PROFESSOR: Yes. How can we, as a rule at the factory and the company employs a machine?

STUDENT: You have obviously refers to the land, buildings, machinery, tools, vehicles, etc. This is often referred to as capital goods or capital. But I am a little confused. There is no question that the land, buildings, etc., are the capital. But we have often talked about when we talk of capital money in the bank and other financial assets to speak.

PROFESSOR: Good point. In theory, the company “capital” is generally used to relate physical capital, such as facilities and equipment. Of course, the word capital is used correctly to mean financial assets, such as “working capital” is not invested in physical capital. But also in the theory of the firm in general, we c “meaning is use physical capital

STUDENTS: Fine, now I understand. But I have another question. Since the theory of the firm on a one-product-based companies, this means that the economy does not deal with multi-product company?

TEACHER: The economy can handle it very well with multi-product company. In fact, these companies are a major issue in the sector of the economy as Industrial Organization known. Do not worry, we are that question in one of the following modules to discuss this topic.

STUDENTS: Would you please summarize what exactly is the theory of the firm, in practice?

TEACHER: Of course. In the theory of the firm, we analyze how the technology used in production, combined with entry price, the unit costs that affect the performance is changed. We also discuss how to modify the request to the company’s products at different prices.

STUDENTS: Sounds good. And what is the purpose of this analysis?

TEACHER: What it means is that, given the cost structure at various levels of production and demand of the market at different prices, we can conclude that production to maximize the profits of the company.

Student: an accurate way of putting it, teacher.

TEACHER: Thank you. And since I “demand” is mentioned, let me tell you that the choices available to businesses in markets they sell to strongly influenced by competition in these markets.

STUDENTS: Just a few, and I would add that are restricted to a certain extent by the company to compete in the markets where they buy their inputs.

PROFESSOR: Yes. Competition in the market selling a business can be more or less intense, depending on the availability of similar products or more, potential substitutes, and the number and characteristics of competing firms. There are basically three types of markets in terms of the structure of competition.

Perfect competition

Under perfect competition, there are many companies in the market produce the same product and no business is large enough to influence market prices. Can you give you an example?

Student: I think they are not too many examples of industrial goods, but in general, to operate, producers of commodities such as grain, oil, etc. in perfect competition. A. Let me add that one of these conditions so that the market is constantly in need of perfect competition, all buyers and sellers of the current prices, to conduct information operations take place which has been forgotten.

TEACHER: Good observation. Not to describe …

Imperfect competition

The most common structure in which it operates imperfect competition. In this market there are a finite number of competing vendors, each selling differentiated products, in varying degrees, another is replaced. What kind of situation you speak of the types of businesses in these markets?

Student: I suppose that most companies decide how much to produce and sell at what price.

Teacher: Right. And of course they have to varying degrees, what to worry the competition. Now let me ask … this kind of competition do you think would be in stark contrast to perfect competition?

STUDENTS: M’s the word: monopoly!

Monopoly

TEACHER: That’s right, a monopoly. This is a situation where there is only one manufacturer of a product, is still the only manufacturer no competition from other local producers and the product can not be imported.

A monopoly has the power not only production but also to determine the price of the product.

STUDENT: That’s nice situation for any company to be in!

TEACHER: Of course. No other vendor can take market share from a monopolist. But while the monopoly may well be affected for the company, it is usually bad for consumers because the monopolist will tend to lead to higher prices than those that would prevail in a competitive situation for free.

STUDENT: Of course I’m sure that’s why most countries regulations to prohibit monopolies, or check if they can not be avoided, cases such as water, electricity and local telephone services.

TEACHER: These are examples of “natural” monopolies, in which consumers have dominant technologies, to pay more if multiple companies were competing in the market than they pay when a well-regulated monopoly is legal. The key word is “existing technologies”, long-distance calls are used to a year of natural monopoly to be there, but no longer the case thanks to modern communications technology.

The basic precondition for the operation of a monopoly is the existence of certain barriers to entry, as provided by patent protection.

But back to the most common type of market, imperfect competition. This type of contract between the two extremes of perfect competition and monopoly, and contains a number of different cases. In general, imperfect competition require products that are currently or in the minds of buyers, not similar but identical markets. Can you imagine a different state?

STUDENT: There are a limited number of potential producers, of which changes every other by its own conduct, performance, pricing, advertising, influence, etc.

PROFESSOR: Yes. The most common cases of imperfect competition is oligopolistic and monopolistic competition.

Oligopoly

Oligopoly exists where the market is dominated by a small group of competitors. Most large companies in these markets. I mention only one example of the PC (personal computer) industry. Here, each company is strong from what affected his rivals in price of the products and innovations in the area.

Monopolistic competition

In such markets there are many companies, but generally distinguished their products or services. The restoration is a good example, especially if one of the big chains. Every single restaurant does not belong to a chain, has a small share of the market competitive, but the difference is that the restaurant has some discretion over the prices. Why do you think that is?

STUDENT: Because, unlike the perfectly competitive markets, these products are not exactly the same. Restaurants are distinguished from the physical location, the type of food they offer, the quality of the food and service, atmosphere, prestige, etc. I’m sure that’s why they have some pricing power, but it is certainly a border. Eventually, customers will be willing to travel further for a meal and / or take on other types and qualities of food and service.

TEACHER: Exactly. Now we discuss the following topic: What determines the behavior of businesses?

Motivation of the company

What do you think is the best answer to this question?

Student: I would say, in a first approximation, that the company is trying to maximize profits. Let me add that the profits are defined as the difference between the income of the company (or gross income) and costs.

PROFESSOR: All companies try to maximize profits is not an unreasonable assumption, in fact, as most companies it seems to be interested in his money. The decisions that a company do in order to maximize their profits, are determined by the current state of the art.

Technology, inputs and the production function

Technology is the total available knowledge about the production of certain goods or services. The companies are limited by the current state of the art. In its decisions, the company must be considered.

The entrance is everything the company uses in its production, machinery, energy, raw materials, labor, etc.

The production function

For the final product, the production function the relationship between the quantities of various inputs per period and the maximum amount of product that can be produced through time is used.

Well, the study, analysis of the production process, we assume that all inputs can be classified into two categories. Can you guess what these two categories?

Student: I can try. Some entries are fixed (for example, machines are available at any point in time) and other variable inputs, whose quantity can be changed in the period. In the second category, with natural boundaries, labor and raw materials.

PROFESSOR: Good. Whether an entry as a fixed or variable depending on the length of the period. The longer the period, all other entries are variable, not fixed. In general, we define two periods: the short and long term.

The short-term than the period in which at least one set of inputs defined economy. As the company are machinery and equipment to the entries difficult to change quickly in the short term usually refers to the period during which companies and institutions are the state fixed mean.

The long term is the period in which all inputs are variable. In the long term it is expected that the company is to make a full adjustment to changes in its environment.

Product by an entry

To determine which production technology, ie, must use whatever combination of inputs, a company it is necessary to define the average product and marginal product of an entry.

The average one entry is the total output by the quantity of inputs are used to produce this amount of production divided. Example: In an eight-hour shift from one machine to produce 800 units of product, the product through the machine 100 units per hour.

The marginal product of an input is the total production by the addition of the last unit of input are kept constant in other inputs. Example: Suppose the machine chocolate bars, then to make the case in hand. With the same machine and ten workers put tablets in case we can produce 1000 cases per hour completed, an average of 100 cases per worker. If we can produce 1090 cases a worker per hour. The marginal product of a worker is 90 cases per hour.

STUDENT: Why is it that the extra workers added that 90 cases of product, while the average was 100 cases per ten workers?

PROFESSOR: Oh, it’s because you are working the infamous law diminishing returns against you! This is perhaps the best known and certainly one of the least understood, the laws of economics

In short, the idea is that if the same be added in increments of a command, the quantities of other inputs is held constant, decrease beyond a certain point increments, which is given by the product. This means that the marginal product will decrease the input. The reasons for this general law are applied in different situations. In our example, we can expect to take the chocolate from the machine on a conveyor belt from which the workers to move it made in the case. How do you put another person on the same assembly line work, the workers will eventually have less space to work efficiently. It is also possible that the 11th. Less educated workers and more efficient than the top ten. Even if you add twelfth workers, it is likely that the marginal product of another person is less than 90 cases per hour, a sort of sequel to be.
DECISION optimal input

Now we are in a position, a very important issue that the optimal combination of inputs to maximize profits answer? In other words, assuming that the company is to produce a certain amount of production, if the combination of the selected inputs to maximize profits? Questions or comments?

STUDENT: Well, obviously, to maximize profits of the enterprise have to minimize the cost of production.

Teacher: Yes, it seems pretty obvious. OK, I’m telling you now that “the company will be charged by the combination of inputs, so that the marginal product of input of one dollar is equal to the marginal product of the dollar used to minimize a different input.”

STUDENTS: It is now apparently not so obvious. Can you explain what that means?

TEACHER: Of course. Going back to our chocolate tablets, for example, that the company has the speed or power the machine consumes more or less per hour and / or change the number of employees in the operation to change the packaging line.

In the practical limits of the machine and space for employees, the company will combine the speed of the machine and the workers, so that the additional cost is for the production of one type is the same when the speed of the machine increases or received an employee.