The Production Process
Average product is
- the amount produced by each unit of a variable factor of production -total product/total units of labor -if marginal product is below average product, the average product falls; if marginal product is above average product, the average product rises
Three decisions a firm must make:
1) how much output to supply 2) which production technology to use 3) how much of each input to demand
Production
A process when firms take inputs and transform them into outputs
MC=MR
Breakeven; the goal of every firm
TC=
TFC+TVC
AFC=
TFC/q
law of diminishing returns
after a certain point, when additional units of a variable input are added to fixed inputs, the marginal product of the variable input declines
rate of return
annual flow of net income generated by an investment expressed as a percentage of the total investment.
Fixed costs
cant be avoided in the short run; there are no fixed costs in the long run -something you will always need to pay (electric bills, rent, etc.) because you cant exit in the short run
Variable cost
cost that depends on the level of production chosen
TFC
costs that dont change with output, even if output is zero
MC < MR
dont want to pay more than you earn
out of pocket costs are sometime referred to as
explicit costs or accounting costs -economic costs include the opportunity cost of every input --these opportunity costs are often referred to as implicit costs
Marginal Cost
increase in total cost that results from the production of 1 more unit of input
optimal method of production
minimizes cost
In a perfect competition,...
no single firm has any control over prices. Follows from 2 assumptions: 1) PCI are composed of many firms, each small relative to the size of the industry 2) each firm in a PCI produces homogeneous products
MC> MR
not good
The Demand curve facing a competitive firm is
perfectly elastic so if a firm raises its price above the market price, it will sell nothing.(it can sell all it produces at the market price, a firm has no reason to reduce its price)
normal rate of return
rate that is sufficient to keep owners and investors satisfied
total revenue
the amount received from the sale of the product (quantity x price)
short run
the period of time for which two conditions hold: the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry --has some fixed factor of production
Firms look to output markets for to input markets for
the price of output the prices of capital and labor
total cost
the total of 1) out of pocket costs and 2) opportunity cost of all factors of production
Profit:
total revenue-total cost