Micro Chapter 7
total revenue
Price x Quantity
(Short hand version) production formula
Q : output L : variable inputs K : fixed inputs
Law of diminishing marginal product
The marginal product of an input gets smaller as one uses more of that input, ceteris paribus. ... typical characteristic of production in the short run... Example: as the shop adds other barbers, the advantage of each additional barber is less, since the specialization of labor can only go so far ... As a result, the total costs of production will begin to rise more rapidly as output increases
Profit
total revenue minus total cost
In the long run, all factors are variable
𝑄=𝑓[𝐿,𝐾] In the short-run, the business can't acquire new capital. Diminishing marginal productivity starts to decline because capital is fixed. In long-run, business can acquire new capital to increase workers, which (in this case) enables it to become more efficient in producing output
categories of factors of production
- Natural resources (land and raw materials) - labor [and know-how] - capital (machines, building, equipment...) used to produce a the product - technology (processes used to create product) - entrepreneurship
ATC, AVC, and MC curves
- average total cost (ATC) : total cost divided by total quantity produced - average total cost curve is typically U-shaped. - average variable cost (AVC) : dividing variable cost divided by quantity produced. - average variable cost curve lies below the average total cost curve and is also typically U-shaped. - marginal cost (MC) change in total cost between two levels of output divided by the change in output - marginal cost curve is upward-sloping.
How output affects total costs
- the marginal cost of the first unit of output is always the same as total cost - As production increases, we add variable costs to fixed costs, and the total cost is the sum of both - always show the fixed costs as the vertical intercept of the total cost curve (aka, costs when production is 0) - while variable costs may initially increase at a decreasing rate, at some point they begin increasing at an increasing rate (diminishing marginal productivity)
Two concepts of profit
Accounting and economic
Ways of calculating costs
Average cost and marginal cost
Lengths of production
Short run, or long run
Cost function
a graph that shows how much various amounts of production cost
Production formula
explains relationship between inputs and outputs
Types of Costs
explicit and implicit
Average profit/profit margin
implies that if the market price is above average cost, average profit, and thus total profit, will be positive. If price is below average cost, then profits will be negative
Fixed inputs
inputs that cannot be changed in the short run (i.e., the building or the lease) (K)
Mariginal Product
the additional output of one more worker Mathematically, Marginal Product is the change in total product divided by the change in labor: 𝑀𝑃=𝛥𝑇𝑃/𝛥𝐿
Marginal cost
the cost of each individual unit/one more unit of output produced 𝑀𝐶=𝛥𝑇𝐶/𝛥𝑄 (the marginal cost of the first unit of output is also always the same as total cost)
Long run production
the period of time during which all factors are variable (K)
short run production
the period of time during which at least some factors of production are fixed (I.e., the lease) (L)
Inputs
the resources—such as labor, capital, materials, and energy—that are converted into outputs (factors of production) They are either fixed or variable
Total Costs (TC)
the sum of the fixed and variable costs for any given level of production total costs depend on the quantities of inputs the firm uses to produce its output and the cost of those inputs to the firm
Average cost
total cost divided by the quantity of output produced. 𝐴𝐶=𝑇𝐶/𝑄
economic profit
total revenue minus total cost, including both explicit and implicit costs
Outputs
Goods and services intended for sale
implicit costs
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
Variable inpits
Inputs that can be easily increased or decreased in a short period of time (I.e., hiring a new person, ordering more ingredients) (L)
Variable inputs
Inputs that can be easily increased or decreased in a short period of time (I.e., hiring a new person, ordering more ingredients) (L)
Average total cost
It measures a degree of output - average total cost (ATC) : total cost divided by total quantity produced - average total cost curve is typically U-shaped. - start off relatively high b/c at low levels costs are dominated by fixed costs...however, will rise as output still increases
Average variable cost
It measures a degree of output - average variable cost (AVC) : dividing variable cost divided by quantity produced. - average variable cost curve lies below the average total cost curve and is also typically U-shaped. - at any level of output, the average variable cost curve will always lie below the curve for average total cost b/c it is a factor of ATC - as output grows, fixed costs become relatively less important (since they do not rise with output), so average variable cost sneaks closer to average cost
Marginal cost
It measures cost of the next unit - marginal cost (MC) change in total cost between two levels of output divided by the change in output - marginal cost curve is upward-sloping b/c diminishing marginal returns implies that additional units are more costly to produce - helps producers understand how increasing or decreasing production affects profits
Accounting profit
It's a cash concept : Total revenue - explicit costs
explicit costs
Out of pocket expenses of actual payments a firm makes to its factors of production and other suppliers as well as wages
Factor payments
Payments by firms for the use of the factors of production (seen as costs or income depending on actor) From the firm's perspective, factor payments are costs. From the owner of each factor's perspective, factor payments are income (I.e., raw material prices, rent, wages, interest dividends, profit)