Chapter 8
Suppose that total cost is $500 when Firm ABC produces 300 units and that total cost is $520 when Firm ABC produces 301 units. For Firm ABC, what is the marginal cost of the 301st unit?
$20.00 Marginal cost is the change in total cost that results from producing one more unit. Since total cost is $500 when producing 300 units and rises by $20 when producing the 301t unit, the marginal cost of the 301 unit is $20.
Suppose when grooming 36,000 dogs, Patty faces the following costs: average varlable cost (AVC) is $20 per unit and total fixed cost (TC) is $25,000. Glven this Information, what will Patty's average total cost (ATC) be?
$20.69 TVC Is equal to AVC x Q.'20x36000=720,000 then 720,000+25,000=745,000 then divide by quanity or by q
Marginal Physical Product (MPP):
The change in output that results from changing the variable input by one unit, with all other inputs held fixed
Minimum Efficient Scale
The lowest output level at which average total costs are minimized.
Marginal Physical Product (MPP)
The change in output that results from changing the variable input by one unit, with all other inputs held fixed.
Marginal Cost (MC):
The change in total cost that results from a change in output: MC = ATC/AQ
Avarage Total Cost (ATC)
(1) ATC = TC/Q. (2) AT =AFC + AVC
Up to a certain point, long-run unit costs of production fall as a firm grows, for two main reasons:
- 1. Growing firms offer greater opportunities for employees to specialize; workers can become highly proficient at narrowly defined tasks, often producing more output at lower unit costs - 2. Growing firms (especially large ones) can take advantage of highly efficient mass production techniques and equipment that ordinarily require large setup costs and are economical only if they can be spread over large numbers of units
Consider the following: Alex is one of the leading widget producers in the country. His total costs amount to $10,000, total fixed costs are $2,000, and average variable costs are $400. How many widgets is Alex producing?
40
Sunk cost:
A cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered
Which of the following scenarios illustrate the average-marginal rule in a noncost setting? Check all that apply.
A professional basketball player averages 20 points per game. In the next game, she scores 30 points, and her average points per game rises as a result. O. Your cumulative GPA is 3.5. This semester you get perfect grades in all classes (4.0 GPA), and your cumulative GPA rises as a result.
Average Fixad Cost [AFC)
AFC = TFC/Q
Average Variablo Cost (AVC)
AVC = TVC/Q
Marginal Cost (MC)
The change in total cost that results from a change in quantity of output: MC = ATC/AQ
A billionalre producer, Ms. Bigbucks, is earning zero economic profit but is still wealthy. This must mean that she has generated enough total revenue to exactly cover:
Both explicit and implicit costs
The average fixed cost curve continually declines (as output rises) because: Total fixed cost is constant as output rises
Costs of Production: Total, Average, Marginal. The correct answer is Total fixed cost is constant as output cost is total fixed costs divided by output (AFC = TFC/Q), and so as the quantity of output rises. In the short run, total fixed costs are constant. The formula for average fixed increases, AFC necessarily declines, See Section:
Production in the Short Run
Firm is producing with at least one input that is fixad.
Zero Economic Profit is Not as Bad as it Sounds
Zero Economic Profit is Not as Bad as it Sounds
Sunk Cost
a cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered
Accounting profit
equals total revenue minus explicit costs.
If a firm earns normal profit, It follows that the firm
is earning zero economic profit. Or/and it could be earning a positive accounting profit.
Total revenue
is equal to the price of a good multiplied by the quantity of the good sold
normal profit
is the profit needed to keep resources employed in a firm.
In the downward-sloping portion of the average variable cost curve, it is always true that the
marginal cost curve is below the average variable cost curve.
If labor is the only variable input and the wage rate is constant, after diminishing marginal returns have set in, then ———————as output increases.
marginal cost is rising
According to the average-marginal rule, when average variable cost is falling
marginal cost must be below average variable cost.
Economic
profit equals total revenue minus the sum of explicit and Implicit costs.
The law of diminishing marginal returns occurs in the
the short run only.
Economic profit is the difference between total revenue and —————————while accounting profit is the difference between total revenue and————————
the sum of explicit costs and implicit costs, explicit costs
Economic profit is equal to
total revenue minus the sum of explicit and implicit costs.
Minimum Efficient Scale and Number of Firms in an Industry
The MES as a percentage sales is not the same for all industries of US consumption or total
Shirking:
The behavior of a worker who is putting forth less than the agreed-to effort
Shirking
The behavior of a worker who is putting forth less than the agreed-to effort.
Economic profit is the difference between total revenue and——————- while accounting profit is the difference between total revenue and—————-
the sum of explicit costs and implicit costs, explicit costs
If economic profit is zero, then it follows that————————— is ——————————assuming that there are no implicit costs.
total revenue, equal to economic profit
In the theory of the firm, exchanges take place at two levels:
- At the level of individuals coming together to form a team - At the level of workers choosing a monitor
Explicit Cost:
A cost incurred when an actual (monetary) payment is made
Explicit Cost
A cost incurred when an actual (monetary) payment is made.
Implicit Cost
A cost that represents the value of resources used in production for which no actual (monetary) payment is made.
Implicit Cost:
A cost that represents the value of resources used in production for which on actual (monetary) payment is made
Long-Run Average Total Cost (LRATC) Curve:
A curve that shows the lowest (unit) cost at which a firm can produce any given level of output
Long-Run Average Total Cost (LRATC) Curve
A curve that shows the lowest (unit) cost at which the firm can produce any given level of output.
Total Cost
A disagreement sometimes arises as to what total cost should include
At any given point in time, the fixed Input is time remaining until the exam. The variable inputs are time spent studying, access to study materials, attention, and retention.
A fixed input is an input whose quantity cannot be changed as output changes. A variable input is an input whose quantity can be changed as output changes. In this example, the completed exam (with a good gradel) is the output. The inputs are time left until the exam, hours spent studying, use of study materials, and so on. The time left until the exam is the only input that cannot be changed. Therefore, this is the fixed Input. The other Inputs are all variable.
Long Run
A period during which all inputs in the production process can be varied. (No inputs are fixed.)
Long Run:
A period during which all inputs in the production process can be varied. (No inputs are fixed.)
Short Run:
A period during which some inputs in the production process are fixed
Short Run
A period during which some inputs in the production process are fixed.
Monitor:
A person in a business firm who coordinates team production and reduces shirking
Monitor
A person in a business firm who coordinates team production and reduces shirking.
sunk cost
A sunk cost is a cost Because a sunk cost cannot be recovered as a result of any decisions account of the cost of the hamburger in deciding to eat the hamburger, Tomas is therefore that has been incurred in the past and that cannot be changed by current decisions and therefore cannot be recovered. taken in the present, it should be ignored in making decisions. By taking committing a fallacy-the sunk cost fallacy,
Average total cost (ATC) equals
ATC is the cost per unit of making a product. Two ways to calculate ATC are: (1) AFC + AVC; and (2) TC + Q.
Average Total Cost (ATC):
Alternatively, we can say that ATC equals the sum of AFC and AVC: ATC = AFC + AVC
Marginal Physical Produd (MPP )
Firm labor, If AQ = 40 units, and AVariable Input =1 then MPP =40 units.
An economist would expect even conscientious workers to shirk more when the cost of shirking falls because economists assume that everyone maximizes utility v.
An economist would expect even conscientious workers to shirk more when the cost of shirking falls because economists assume that everyone maximizes utility v.
Business Firm:
An entity that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, or the government
Business Firm
An entity that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, or the government.
A firm that is making normal profit is covering both explicit and implicit costs and is earning zero economic profits.
An explicit cost is a cost incurred when an actual (monetary) payment is made. An implicit cost represents the value of resources used in production for which no actual (monetary) payment is made. Economic profit is the difference between total revenue and total cost, Including both explicit and implicit costs. If a firm earns a normal profit, it is earning just enough to keep resources fully employed. Thus, its revenues exactly cover its explicit and implicit costs, and the firm is earning zero economic profit. See Section: Accounting Profit versus Economic Profit.
Variable Input:
An input whose quantity can be changed as output changes
Variable Input
An input whose quantity can be changed as output changes.
Fixed Input:
An input whose quantity cannot be changed as output changes
Fixed Input
An input whose quantity cannot be changed as output changes.
explicit
An———————— cost is a cost that is Incurred when an actual monetary payment is made.
Law of Diminishing Marginal Returns:
As ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline
Law of Diminishing Marginal Returns
As ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline.
The government says that firm X must pay $1,000 in taxes simply because it is in the business of producing a good. Which of the firm's cost curves will be affected by this lump-sum tax? Check all that apply.
Average fixed cost • Total fixed cost • Total cost • Average total cost
As output increases, average fixed cost decreases; therefore, as output increases, average variable cost makes up a larger portion of average total cost curve. It follows that the average total cost curve and average variable costs curve would get closer to each other as output increases.
Average total cost is the sum of average fixed cost and average variable cost. In other words, ATC = AFC + AVC. Average total cost (ATC) is calculated as total costs divided by the quantity produced ( ). Average fixed cost (AFC) is calculated as total fixed costs divided by the quantity produced (). Average variable cost (AVC) is calculated as total variable costs divided by the quantity produced ( ). Fixed costs do not change in the short run. Therefore, as output (Q) Increases, AFC gets smaller and smaller, and AVC begins to approach ATC. See Section: Costs Production: Total, Average, Marginal.
Fixed Costs:
Costs that do not vary with output; the costs associated with fixed inputs
Fixed Costs
Costs that do not vary with output; the costs associated with fixed inputs.
Variable Costs:
Costs that vary with output; the costs associated with variable inputs
Variable Costs
Costs that vary with output; the costs associated with variable inputs.
Production in the Short Run
Firm produces with capital and labor, where capital is the fixed input and labor is the variable input.
Diseconomies of scale are present between points
Diseconomies of scale occur when inputs are increased by some percentage and output increases by a smaller percentage. When diseconomies of scale are present, the LRATC curve is rising; thus, diseconomies of scale are represented in the graph between points C and D.
Is the level of profit necessary to keep resources employed in a firm.
Economic profit (or nomal profit)
Economies of Scale:
Economies that exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to call
Economies of Scale
Economies that exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall.
The Alchian-and-Demsetz Answer
Economists Armen Alchian and Harold Demsetz suggest that firms are formed when benefits can be obtained form individuals working as a team. Sum of team production > Sum of individual production
Sunk cost:
Economists' Advice: Ignore Sunk Costs; a present decision can affect only the future, never the past
Production in the long run
Firms use two inputs-capital 19 and labor (Lj-and both are variable.
Long-Run Average Total Cost (LRATC) Curve:
If we were to ask the same question for every possible output level, we would derive the LRATC
Behavior Economics and Sunk Cost:
In a study, researchers found that people who paid more for their tickets to the theater attended more often than those who paid less
Production in the Short Run and the Law of Diminishing Marginal Returns
In the short run, as additional units of a varlable Input are added to a fixed Input, the marginal physt cal product of the varlable Input may Increase at first. Eventually, the marginal physical product of the varlable Input decreases. The product polnt at which marginal physical decreases Is the polnt at which diminishing marginal returns have set in.
Common Misconceptions About the Short Run and Long Run
Individuals naturally think that the long run is a longer period than the short run, but this is not the right way to differentiate between the two
Diseconomies of scale
Inputs increase by, say, 5 percent, and guantity of output increases by, say, 2 percent.
Constant returns to scale
Inputs increase by, say, 5 percent, and quantity of output increases by 5 percent.
Economies of scale
Inputs increase by, say, 5 percent, and quantity of output increases by, say, 9 percent.
Common Misconceptions About the Short Run and Long Run
Instead, think of each as a period during which some condition exists: The short run is the period during which at least one put is fixed (it could be for 6 months, 2 years, etc. The long run is the period during which all inputs are variable (i.e., no input is fixed; the short run could be a longer period than the long run
When economies of scale are present, the ————-curve is—————-
LRATC, downward sloping
Marginal Cost (MC)
MC - ATC/AQ
Marginal Cost (MC)
MC. Here it is: Thare is a second way of computing MĆ =W/MPP where W =wage rate and MPP = marginal physical.
Marginal Physical Produd (MPP)
MPP = AQ/AVariable Input
Marginal cost is the additional cost of producing an additional unit of output.
Marginal cost is the additional cost of producing an additional unit of output. When labor is the variable input, marginal cost is wage divided by marginal physical product of labor
One reason why economies of scale occur is that
a growing firm has opportunities to engage in specialization of labor, which can help to reduce unit costs.
Marginal Physical Product and Marginal Cost
Notice that as the MPP curve rises, the MC curve falls; and as the MPP curve falls, the MC curve rises.
constant returns to scale
Percentage increase in output is equal to percentage increase in inputs.
Economies of scale
Percentage increase in output is greater than percentoge increase in inputs.
Diseconomies of scale
Percentage increase in output is less than percentage increase in inputs.
Residual Claimant:
Persons who share in the profits of a business firm
Residual Claimant
Persons who share in the profits of a business firm.
Minimum Efficient Scale and Number of Firms in an Industry
Some industries have a smaller number of firms
Average Productivity
Usually, when the term labor productivity is used in the newspaper and in government documents, it refers to the average hourly (physical) productivity of labor
Total Cost (TC)
TC = TFC + TVC
Total Fixad Cost (TFC)
TFC =AFC/Q
Tolal Variable Cost (TVC)
TVC = AVC x Q
Technology
Technology often brings (1)the capability of using fewer inputs to produce a good, or (2) lower input prices
Diseconomies of Scale:
The condition when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise
Diseconomies of Scale
The condition when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.
Constant Returns to Scale:
The condition when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant
Constant Returns to Scale
The condition when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant.
Zero economic profit is not as bad as It sounds because when the firm earns zero economic profit: O It earns enough revenue to cover both its explicit and implicit costs
The correct answer is It earns enough revenue to cover both its explicit and implicit costs. Af that earns normal profit is earning revenue is doing at least as well as it could have done in the next best deployment equal to its total costs (explicit plus implicit costs). In particular, since the firm is covering its implicit costs when it earns zero economic profit, it of its resources. Thus, earning zero economic profit is not as bad as it may sound. It means, for example, that the firm is earning enough revenue to cover any salary forfeited by its owner and a normal or competitive return on capital. See Section: Zero Economic Profit Is Not as Bad as It Sounds,
People often argue that large firms in an industry have cost advantages over small firms in the same industry. For example, they might assert that a big oll company must have a cost advantage over a small oil company. For this to be true, what condition must exist?
The correct answer is There are economies of scale, and the large firm is operating at an output level at which economies of scale exist. It is not correct to assume that large firms are more cost efficient than smaller firms. Diseconomies of scale will arise if a firm's size leads to coordination, communication, and monitoring problems. In very large firms, managers often find it difficult to coordinate work activities, communicate their directives to the right persons in a timely way, and monitor personnel effectively. In order for a large firm to have cost advantages over a smaller firm, it must be operating where economies of scale exist - In other words, the firm must be operating where an Increase in inputs leads to a greater than proportionate increase in output, and long-run average total costs are falling.
Accounting Profit:
The difference between total revenue and explicit costs
Accounting Profit
The difference between total revenue and explicit costs.
Profit:
The difference between total revenue and total cost
Economic Profit:
The difference between total revenue and total cost, including both explicit and implicit costs
Economic Profit
The difference between total revenue and total cost, including both explicit and implicit costs.
Profit
The difference between total revenue and total cost.
Law of Diminishing Marginal Ratuns
The law of diminishing marginal returns holds only In the short run, when at least one input is fixed.
The law of diminishing marginal returns applies to the short run, when at least one input is fixed, whereas diseconomies of scale occurwhen all inputs are variable and is therefore a long-run concept.
The law of diminishing marginal returns states that as larger amounts of a variable input are combined with fixed inputs, eventually, the marginal physical product of the variable input will decline. For example, suppose a baker bakes cookies in a bakery and that the size of the bakery, the number of ovens, and other inputs are fixed in the short run. If a second baker, then a third baker, and then a fourth, and so on, join the bakery, each additional baker, according to the law of diminishing marginal returns, will bake fewer additional cookies than the previous one. The law of diminishing marginal returns arises from the fact that some inputs are fixed in the short run, In the long run, by contrast, all Inputs are variable. Diseconomies of scale occur when all inputs are increased by some percentage, but output increases by a smaller percentage, causing unit costs to rise.
As long as the marginal benefit of producing each successive unit is greater than the marginal cost, a firm will increase its total profits by Increasing Its production. So, even after marginal cost begins to rise (as diminishing returns set in), producers are likely to continue producing until the marginal cost equals the marginal benefit from selling the good.
The law of diminishing marginal returns states that when larger and larger amounts of a variable input are combined with fixed inputs, eventually, the marginal physical product of the variable input will decline. When this dedine occurs, marginal cost will rise. As long as the marginal benefit (marginal revenue) from producing an additional the marginal cost of producing that unit, a producer should produce the unit because the marginal profit (additional profit) from that unit is positive. In order to maximize the total profit, the producer should produce up to the point where the marginal benefit (marginal revenue) unit of output is greater than equals the marginal cost.
Law of Diminishing Marginal Ratuns
The law of diminishing marginal returns states that, as ever larger amounts of a varlable input are combined with a fixed input, eventually the MPP of the variable input declines.
Minimum Efficient Scale:
The lowest output level at which average total costs are minimized Economies of scale→ LRATC is falling Constant returns to scale → LRATC is constant Diseconomies of scale → LRATC is rising
The marginal physical product curve (MPP) and average product curve (AP) always intersect at the maximum of the average product curve.
The marginal physical product curve intersects the average product curve at the point of maximum average product, where average product is neither increasing nor decreasing. This is because when marginal product exceeds average product, so that an additional worker adds more to total output than workers prevlously produced on average the average product rises;
Which of the folowing statements is true?
The market guides and coordinates individuals' actions in an impersonal way through the forces of supply and demand. Managerial coordination is more personal; someone tells someone else what to do.
Market Coordination:
The process in which individuals perform tasks, such as producing certain quantities of goods, on the basis of changes in market forces, such as supply, demand, and price
Market Coordination
The process in which individuals perform tasks, such as producing certain quantities of goods, on the basis of changes in market forces, such as supply, demand, and price.
Managerial Coordination:
The process in which managers direct employees to perform certain tasks
Managerial Coordination
The process in which managers direct employees to perform certain tasks.
Total Cost (TC):
The sum of fixed costs and variable costs (TC = TFC + TVC)
Total Cost (TC)
The sum of fixed costs and variable costs.
Production in the long run
There are no fixed inputs in the production process. All inputs are variable.
Diseconomies of Scale?
There is also a monetary incentive not to pass the point of operation at which diseconomies of scale exist, and firms usually find ways to do so, including reorganizing, dividing operations, etc.
What relationship exists between the average fixed cost (AFC) curve and the marginal cost (MC) curve?
There is no relationship between the AFC curve and the MC curve.
What relationship exists between the average fixed cost (AFC) curve and the marginal cost (MC) curve?
There is no relationship between the AFC curve and the MC curve. There is no relationship between the AFC curve and the MC curve. Average fixed cost is calculated by dividing total fixed cost by output. Since total fixed cost is constant as output increases, average fixed cost declines as output increases,
Diseconomies of Scale?
These usually arise at the point where a firm's size causes coordination, communication, and monitoring problems
Firms
They trade some control over their daily behavior in order to receive a larger absolute amount of the potential benefits of the team
Average total cost (ATC) equals
Total cost divided by output: TC + Q. The sum of average fixed cost and average variable cost: AFC + AVC.
Average Total Cost (ATC), or Unit Cost
Total cost divided by quantity of output: ATC = TC/Q
Average Total Cost (ATC):
Total cost divided by quantity of output: ATC = TC/Q.
Total costs equal total variable costs when: There are no fixed costs
Total costs for a firm are the sum of total fixed costs and total variable costs. If there are no fixed costs for a firm, then all the costs are variable costs, and so TFC = 0 and TC = TVC.
Average Fixed Cost (AFC)
Total fixed cost divided by quantity of output: AFC= TFC/Q.
Average Fixed Cost (AFC):
Total fixed cost divided by quantity of output: AVC = TFC/Q
Average Variable Cost (AVC):
Total variable cost divided by quantity of output: AVC = TVC/Q
Average Variable Cost (AVC)
Total variable cost divided by quantity of output: AVC = TVC/Q.
Tying Production to Costs
What happens In terms of production (MPP rising or falling) affects MC, which in tun eventually affects AVC and ATC.
Constant returns to scale
When the firm experiences constant returns to scale, its LRATC curve is constant.
Diseconomies of scale
When the firm experiences diseconomies of scale, its LRATC (long- run average total cost) curve rises.
Economies of scale
When the firm experiences econo mies of scale, its LRATC (longrun average total cost) curve declines.
Average-marginal rule:
When the marginal magnitude is above the average magnitude, the average magnitude rises; when the marginal magnitude is below the average magnitude, the average magnitude falls
Average-Marginal Rule
When the marginal magnitude is above the average magnitude, the average magnitude rises; when the marginal magnitude is below the average magnitude, the average magnitude falls.
Average Productivity
When the press or laypersons use the word productivity, they are usually referring to average physical product instead of marginal physical product
Normal Profit:
Zero economic profit, the level of profit necessary to keep resources employed in a firm. A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit costs)
Normal Profit
Zero economic profit, the level of profit necessary to keep resources employed in a firm. A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit costs).
Constant returns to scale exist when inputs are increased by some percentage and output increases by percentage,————- causing unit costs to—————
an equal, remain constant
Constant returns to scale exist when inputs are increased by some percentage and output increases by ————-percentage, causing unit costs to——————
an equal, remain constant
Fixed costs
are costs that do not vary with output.
Which of the following curves is never U-shaped?
average fixed cost
At a given level of output, the vertical distance between the average variable cost curve and the average total cost curve is equal to
average fixed cost. Average total cost (ATC) is the sum of average variable cost (AVC) and average fixed cost (AFC). The vertical distance between the ATc curve and the AVC curve at any given level output must be equal to AFC.
There are two sides to every market:
buying and selling
Consider the following information about a business Jerry opened last year: price = $20, quantity sold = 15,000; Implicit cost $150,000; explicit cost = $120,000. What was Jerry's economic profit?
c. $30,000
When the firm experiences ———————its———————— is constant.
constant returns to scale, LRATC
The change in output that results from changing a variable input by one unit, hoiding all other inputs fixed, is called the ————————product.
marginal physical
The total cost that a firm incurs is related to the production of the firm;
produce nothing, incur no costs; produce something, incur costs
The law of diminishing marginal returns is
relevant to the short run, but not the long run.
There are two sides to every business firm:
revenue and cost sides; we can see both of these sides by focusing on profit
As MPP of labor——————— MC———————
rises, declines
As the marginal physical product of a variable input ————————-the marginal cost———————-
rises, falls and falls, rises
The law of diminishing marginal returns holds for a situation in which
some inputs are variable and some Inputs are fixed.
The law of diminishing marginal returns holds for a situation in which
some inputs are variable and some inputs are fixed.
If the average total cost curve is falling,
the MC curve must be below it.
The marginal physical product (MPP) of a variable Input is
the change in total output that results from changing the variable Input by one unit.
The marginal physical product (MPP) of a variable input is
the change in total output that results from changing the variable input by one unit.
In the long run, all inputs are————————- and all costs are————————
variable, variable
In the long run, all inputs are———————- and all costs are————————
varlable, variable
When labor is the variable input, marginal cost equals
wage divided by marginal physical product of labor
Input Prices
• A rise or fall in variable input prices causes a corresponding change in the firm's average total, average variable, and marginal cost curves
Taxes
• A tax won't affect a firm's fixed costs because the tax is paid only when output is produced, and fixed cost is present even if output is zero
Minimum Efficient Scale and Number of Firms in an Industry
• By dividing the MES 100, we can estimate the as a percentage of total sales into number of efficient firms it takes to satisfy total consumption for a product
Markets: Outside and Inside the Firm
• Economics is largely about trades or exchanges, market transactions
Ronald Coase on Why Firms Exist
• Firms exist either to economize on buying and selling everything or to reduce transaction costs
Long-Run Average Total Cost (LRATC) Curve:
• Given a decision between 3 different plant sizes, a manager will choose the plant size represented by SRATC that corresponds to the quantity he wants to produce, which yields the lowest unit cost
Technology
• In either case, technological changes lower variable costs and so average variable cost, average marginal costs; the cost curves shift downward total cost, and