Understand economics from scratch

Chapter 17 Why is the career of Americans to run a business—the economics of manufacturers that you must understand (1)
In 1920, John Calvin Coolidge was elected the 29th Vice President of the United States. After President Harding died suddenly in 1923, Coolidge took over as President of the United States and was re-elected in 1924.He favored small government in politics and was known for his classical liberal conservatism.During his tenure, Coolidge swept away the shadow of political scandals during the Warren Harding administration and restored the public's trust in the White House, so he left office with high prestige.President Coolidge's biographer said: "He embodies the spirit and hope of the middle class, and can explain their vision and express their opinions." President Coolidge has a famous saying: "The business of an American is to run a business." His view Not only is it rooted in his deep insight into the 200-year history of the founding of the United States, but also expresses his pride and pride in the prosperity of the American free market economy.

Economics must study production issues, and production activities in modern society are organized into manufacturers and enterprises. Therefore, starting from the theory of manufacturers put forward by classical economists, the economics of manufacturers with rich content has been developed.

Production cost: why some production is not cost-effective
In life, production is everywhere, and cost is inseparable from production.All businesses have to pay rent, air conditioning, printers, electricity, secretaries and accountants for their own inputs.When formulating production strategies, all enterprises understand that for every point of waste, the profit of the enterprise will be reduced by one point.

Cost is the production expenditure of the enterprise, which can be divided into total cost, fixed cost and variable cost, marginal cost, average cost and so on.All businesses calculate the costs and benefits of their production before proceeding with production.When the enterprise believes that the production cost is greater than the total income, it will consider such production uneconomical and stop production.

1. Total cost

The amount of money paid by different enterprises using different capital, labor and raw materials is the total cost of the enterprise, and the amount of money obtained by selling their products is the total income of the enterprise.

2. Fixed and variable costs

In the short run, the total cost of an enterprise can be further divided into fixed costs and variable costs.The fixed cost of an enterprise is also called sunk cost, which includes plant rent, office rent and other equipment costs, as well as interest on debts and annual salaries of important employees.These costs are fixed costs that must be paid even if the firm produces zero volume, and fixed costs are not affected by any output volume.A firm's variable costs represent expenditures that vary with the level of output, including raw materials, wages, and fuel, and all costs that are not fixed.In the long run, all costs are variable costs, and fixed costs do not exist at this time.

3. Marginal cost
边际成本表示由于多生产1单位产出而增加的成本。例如，如果生产100张年画的总成本是100元，那么生产101张年画的总成本是100.3元，那就可以说生产第101张年画的边际成本是0.3元。

4. Average cost
In business, people often use the concept of average cost, which is the total cost divided by the total number of units of a product.Average cost is divided into average fixed cost and average variable cost.The average fixed cost is the constant total fixed cost divided by the increasing output, so as time goes by, the average fixed cost becomes smaller and smaller, even infinitely small.

The Law of Diminishing Marginal Product: The Relationship Between Inputs and Output

The increased input and the output obtained by the enterprise are not completely proportional, because there is a law of diminishing marginality in this process: that is, as the input increases, the additional output obtained gradually decreases.

In order to examine the connection between the production process and its total cost, we take Dawei's pastry shop as an example.

Let’s first assume that we are looking at short-term business behavior, that is to say, Dawei’s pastry shop has not made significant technological progress, the scale is fixed, and the amount of pastry produced in the shop is determined by the number of workers.

When Dawei employs 1 worker, 50 pastries can be produced in the shop.When there are 2 workers, 90 pastries can be produced, and when there are 3 workers, 120 pastries can be produced...

It expresses the relationship between input (number of workers) and output (quantity of pastries), and is called a production function.It can also be seen that as the number of workers increases, so does the number of pastries.From this, economists came up with the concept of marginal product—the increase in output obtained when the input is increased by 1 unit.

It is worth noting that as the number of workers increases, the marginal product of workers decreases gradually.It is easy to calculate that the marginal product of the first worker is 50 yuan, the marginal product of the second worker is 40 yuan, the marginal product of the third worker is 30 yuan, and the marginal product of the fourth worker is only 20 yuan. block.The possible reason is that due to the increase of workers, everyone can only share equipment, and the sharing space is getting smaller and smaller, which reduces the efficiency of workers.The law of diminishing marginal returns can be stated as follows: When adding an input, holding other conditions constant, the marginal product of the added input will gradually decrease at least starting from a certain point.However, like other laws, the law of diminishing marginal product also has preconditions—there is no major change in production technology and the fixed factors of production remain unchanged. Both of these factors are indispensable.

The law of diminishing marginal returns is also common in other industries.For example, in agriculture, farmers' use of fertilizers contributes the most to yield increases at the beginning, and as fertilizers increase, the contribution of increasing fertilizers becomes less and less, and finally becomes negative.Another example is that in terms of personnel, the existence of surplus personnel in the government and enterprises makes the agencies overstaffed, and the law of diminishing marginal product exists seriously. At this time, it is necessary to "reduce personnel and increase efficiency".

Cost curve: the degree of control of the cost of the enterprise
In the short term, what kind of situation is the scale of an enterprise to have the best average income?To answer this question, it is necessary to understand the cost curve of the enterprise, among which the marginal cost curve, the average total cost curve and the relationship between them are particularly noteworthy.

1. Marginal costs are rising all the way

Due to the law of diminishing marginal output in production, the marginal cost of the enterprise rises with the increase of output.In the previous pastry shop example, when Dawei was initially producing pastries, many of his fixed costs (such as ovens, greenhouses, baking trays, molds, etc.) had not been fully utilized and therefore had great potential for use, so The marginal product of adding additional workers is large, while the marginal cost of increasing the production of pastries is small.On the contrary, when the pastry shop produces a large number of pastries, the fixed cost has been fully utilized, the working environment of the workers is crowded, and the equipment is shared by many people. At this time, the marginal product of the increased workers is small, and the marginal cost of the increased pastries begins to increase. big.

2. The average total cost curve is U-shaped

This is because average total cost is composed of average fixed cost and average variable cost.The average total fixed cost is spread across all products and thus falls as output increases.Average variable total cost generally increases with output due to diminishing marginal product.In initial production, average total cost is extremely high because fixed costs are spread over a small number of products.As output increases, average total cost tends to decrease.But when the production of enterprises exceeds a certain amount, the average total cost starts to climb again.

3. The Fantastic Lowest Average Total Cost
You will find an amazing phenomenon——with the intersection point of the marginal cost curve and the average total cost curve as the boundary, the average total cost curve changes the downward trend and begins to rise.This point of intersection is called the lowest point of average total cost by economists.In other words, when the average total cost of a firm is higher than the marginal cost, the average total cost is on a downward trend; and when the average total cost is equal to the marginal cost, it is at its lowest point, and when the average total cost is lower than the marginal cost, it is in a downward trend. Upward trend.The lowest point of average total cost is at the efficient scale of the enterprise.Only when the enterprise is at this scale can its average income be the highest.

Short-term costs and long-term costs: time for companies to "turn over"

A firm's fixed costs are immutable in the short run and variable in the long run.In real life, many entrepreneurs prefer to stay in an industry for a long time, and they may want to make the company stronger and bigger.So what kind of economic scale to choose in the long run to improve production efficiency and maximize the benefits of the enterprise is a question that many people are concerned about.

Take Changhuai Automobile Company as an example.In just a few months, Changhuai Automobile Company is unable to make substantial adjustments to the number and scale of automobile factories.The only way to increase production is to increase auto workers.Therefore, its fixed cost is certain.However, after several years of development, the capital and technology accumulated by Changhuai Automobile Company are sufficient to greatly expand its scale and increase the number of production workshops.Thus, the fixed costs of the plant are variable in the long run.Therefore, the firm's long-run and short-run cost curves are different.

(End of this chapter)