Theory of the Producer

       The individual producer or firm is assumed to possess a production function, which specifies the quantity of-output produced as a function of the quantities of the inputs used in production. The producer's revenue equals the quantity of output produced and sold times its price, and the cost to the producer equals the sum of the quantities of inputs purchased and used times their prices. Profit is the difference between revenue and cost. The producer is assumed to maximize profits subject to the technology given by the production function. Profit maximization requires that the producer use each factor to a point at which its marginal contribution to revenue equals its marginal contribution to cost.

       Under pure competition, the producer is a price taker who may sell at the going market price whatever has been produced. Under monopoly (one seller) the producer recognizes that price declines as sales are expanded, and under monopsony (one buyer) the producer recognizes that the price paid for an input increases as purchases are increased.

       A producer's cost function gives production cost as a function of output level on the assumption that the producer combines inputs to minimize production cost. Profit maximization using revenue and cost functions requires that the producer equate the decrement in revenue from producing one less unit (called marginal revenue) to the corresponding decrement in cost (called marginal cost). Under pure competition, marginal revenue equals price. Consequently, the producer equates marginal cost of production to the going market price.

 

VOCABULARY

behavior – поведение

to investigate – исследовать

applied economics – прикладная экономика

distinction – отличие

subject – предмет, субъект

matter – вопрос, материал

to blur – затуманивать, размывать

to remain – оставаться

exchange ratio – ставка (соотношение) обмена

optimization – оптимизация

utility – полезность

utility function – функция полезности

satisfaction – удовлетворение

constraints – ограничение

monopsony – монопсония (рынок, на котором выступает лишь один покупатель товара, услуги или ресурса)

opportunity cost – альтернативные издержки

to sacrifice – пожертвовать, приносить в жертву

to undertake – взять на себя

to allow – позволять, разрешать

to influence – влиять

to maximize – максимально увеличивать

revenue – доходы

 

General understanding:

1. What is, according to the text, microeconomics?

2. What is meant by «economics in the small»?

3. What economic phenomena are of microeconomists attention?

4. Where is microeconomic theory used?

5. What is «optimization»?

6. What is the concept of the theory of consumer?

7. What is the major difference between the theory of consumer and the theory of producer?

 

1. Find equivalents in Russian:

a. optimizing behavior of individual units

b. industrial organization

c. labor economics

d. international trade

e. cost-benefit analysis

f. sharp distinction in both methodology and subject matter

g. subjective rate of substitution

2. Translate into Russian:

A. Microeconomic theory is used extensively in many areas of applied economics.

B. Their analyses are derived from the aggregation of the behavior of individual units.

C. The consumer then selects a bundle that gives the highest possible level of utility.

D. The consumer is free to choose whatever quantities income allows but has no influence over prevailing market prices.

E. The producer equates marginal cost of production to the going market price.

F. The producer recognizes that price declines as sales are expanded.

G. Under pure competition, the producer is a price taker who may sell at the going market price whatever has been produced.

 

3. Give definition to the following:

 

a) microeconomics

b) applied economics

c) optimization

d) opportunity action

e) utility maximization

 

Questions for discussion:

1. What areas of applied economics are of the most importance?

2. What distinction in methodology between macro – and microeconomics is the most distinctive?

3. Does the author's concept of theories of consumer and producer comply with your own?

 

Текст №13

 

Law of supply

       Supply is a fundamental concept in both macro- and microeconomic analysis. In macroeconomic theory, aggregate supply is mainly a function of expected sales to consumers, businesses, and governments. In microanalysis supply is mainly a function of prices and costs of production. A more complex view of the supply curve for a commodity is its relation between quantities forthcoming and the possible current prices of that commodity, its expected future prices, the prices of alternative goods and services, the costs of the producer, and time.

 

Opportunity Costs

       Incorporated in the supply curve of goods and_services are opportunity costs. Economists differ from accoun­tants and from the Internal Revenue Service by including both explicit and implicit costs, or opportunity costs. Implicit costs are mainly business costs for wages, rents, and interest, whereas opportunity costs are the alternative costs of doing something else. A sole proprietor or the owners of businesses should calculate what they forgo in wages, rents, and interest by not working for someone else, or by renting the property they use to others, or by the possibility of converting plant and equipment to alternative investment projects.