Micro Chapter 13
Implicit Costs
$ and other costs we don't pay attention to. Costs that do not require an outlay of money by the firm. An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business
What are two rules regarding MC
MC=P and MC=AVC
When demand is inelastic/elastic is also will change what?
Marginal Cost
What do you want in your marginal profit?
Marginal Cost=Marginal Profit=0
Where does Marginal Cost cross
ATC and Variable cost at minimum
Total Cost Curve
As the curve gets steeper it becomes more costly to produce an extra item which diminishes marginal product. • At low levels of output, the firm experiences increasing marginal product, and the marginal- cost curve falls. Eventually, the firm starts to experience diminishing marginal product, and the marginal cost curve starts to rise. This combination of increasing then diminishing marginal product also makes the average variable cost curve U-shaped
Why does the marginal cost cross the average total cost curve at its minimum?
At low levels of output, marginal cost is below average total cost, so average total cost is falling. But after the two curves cross, marginal cost rises above average total cost
Marginal Cost
Change in Total Cost (%)/ Change in quantity. tells us the increase in total cost that arises from producing an additional unit of output.
Fixed Costs
Costs that do not vary with the quantity of output produced They are incurred even if the firm produces nothing at all
Explicit Cost
Costs that require an outlay of money by the firm The opportunity costs require the firm to pay out some money, they are called explicit costs.
Variable Costs
Costs that vary with the quantity of output produced
Average Fixed Costs
Fixed cost divided by the quantity of the output
What are two main factors when deciding how much to produce?
I can minimize cost thus I can maximize profit
price at which business is marketing at a highly competitive point
MC=ATC
Property of Diminishing Marginal Product
Marginal cost rises with the quantity of output produced. When a small quantity is produced, there are few workers, and much of equipment is not used. Because these idle resources can easily be put to use, the marginal product of an extra worker is large, and the marginal cost of an extra product is small.
Short Run v. Long Run
Short Run fixed decisions. Long Run variable decisions. As the firm moves along the long run curve, it is adjusting the size of the factory to the quantity of production, more flexible curve than short run.long run average total cost is falling at low levels of production because of increasing specialization and rising at high levels of production because of increasing coordination problems.
Total Cost
The amount that the firm pays to buy inputs. Firms incur costs when they buy inputs to produce the goods and services that they plan to sell. Fixed plus Variable costs
Total Revenue
The amount that the firm receives for the sale of its output. =Q(P)
Efficient Scale
The bottom of the U- shape occurs at the quantity that minimizes average total cost.
Production Function
The quantity of inputs (workers) and quantity of output (cookies)
Oligopoly
Very few competitors (railroads)
Economies of Scale
When long run average total cost declines as output increases. often arise because higher production levels allow specialization among workers, which permits each worker to become better at a specific task.
Diseconomies of Scale
When long run average total cost rises as output increases. arise because of coordination problems that are inherent in any large organization
Relationship between marginal cost and average total cost
Whenever marginal cost is less than average total cost, average total cost is falling and vice versa.
Marginal Product
any input in the production process is the increase in the quantity of output obtained from one additional unit of that input
Profit
firm's total revenue minus its total cost
Economic Profit
the firm's total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold.
Average Total Cost
total cost/quantity, cost tells us the cost of the typical unit, but it does not tell us how much total cost will change as the firm alters its level of production. curve is U- shaped because the average total cost is the sum of average fixed cost and average variable cost. Average fixed cost always declines as output rises because the fixed cost is spread over a larger number of units. Average variable cost typically rises as output increases because of diminishing marginal product. The tug of war between average fixed cost and average variable cost generates the U- shape in average total cost. At very low levels of output, average total cost is very high. Even though average variable cost is low, average fixed cost is high because the fixed cost is spread over only a few units. As output increases, the fixed cost is spread more widely. Average fixed cost declines, rapidly at first and then more slowly. As a result, average total cost also declines.At low levels of production, the firm benefits from increased size because it can take advantage of greater specialization
For a business to be profitable what must be true?
total revenue must cover all the opportunity costs, both explicit and implicit