Discussion Topic 1: Discussing Profit

COLLAPSE

You are approached by a colleague with the following query:

"Profits seem to have a different meaning for economists. Surely it can't be that complicated; profits equal sales revenues minus costs? I am particularly confused by the conclusions they draw about ‘normal profit'. How can you have any profit when average total cost exactly matches a business' average total revenue? How can it be ‘normal' to earn zero profits?"

Discuss these contentions. In your discussion, you should highlight the meaning of costs and profit used by economists and contrast it with the focus given by accountants. Give some examples of decisions you may make in business when an economist's definition of costs would be more relevant.

Discussion Topic 2: Factor Productivity and Variable Costs

Explain the link between factor productivity and variable costs. Use the example of labor productivity to illustrate the following:

a. If the average variable cost curve is U-shaped, what does this imply about average labor productivity?

b. What assumptions do we have to make about the nature of production in the short run in order to arrive at U-shaped average cost curves?

Can we draw any conclusions about marginal productivity and costs from the shape of their associated average curves?

Discussion Topic 3: P = AR always?

"Price is always equal to average revenue. It is a mathematical certainty." Discuss this statement fully. Does this imply that P is always equal to marginal revenue as well?

Discussion Topic 4: Profitability in the Short and Long run

Consider the following opinion expressed by a farmer:

"All this talk about businesses wanting to maximize profits doesn't hold water for me. As a farmer who has a 30 year history of growing vegetables in the Adelaide Hills, I have found that most years I was lucky if I met my weekly wage bill and other incidental costs. Most of my time was spent watching for new vegetables that were doing well in the market so that I could switch production to them. Unfortunately other growers were doing the same thing and so, by harvest time I was back trying to find enough sales revenue to meet those weekly costs again! How can you maximize profits when the revenue side of your business is captive to the fixed price you get in the market and the size of your fields? The only small growers who seem to survive over time are those who sell out to the larger food conglomerates and any profits they seem to make come from their ability to reduce their costs by farming on a large scale."

Use your understanding of the meaning of profits and the objective of profit maximization to explain the conditions that govern survival vs shut down for a price-taking firm in the short run. Pass comment as well on the grower's view that survivability of price-taking firms depends on minimizing costs in the long run.