Law of Supply
Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.
*This results in a supply curve that slopes upward
Firm's Objective
The economic goal of the firm is to maximize profits.
Total Revenue
The amount a firm receives for the sale of its output.
Total Cost
The market value of the inputs a firm uses in production.
Profit
the firm's total revenue minus its total cost.
Cost of Production
includes all the opportunity costs of making its output of goods and services.
-Involves explicit and implicit costs
-can be divided into fixed and variable costs
Explicit Costs
input costs that require a direct outlay of money by the firm.
Implicit Costs
input costs that do not require an outlay of money by the firm.
Economic Profit
total revenue minus total cost, including both explicit and implicit costs
Accounting Profit
the firm's total revenue minus only the firm's explicit costs.
When total revenue exceeds both explicit and implicit costs, the firm earns .....
economic profit.
-Economic profit is smaller than accounting profit.
Fixed Costs
those costs that do NOT vary with the quantity of output produced
-Average fixed cost = fixed cost divided by the quantity of the output
Variable Costs
those costs that DO vary with the quantity of output produced
-Average Variable costs = variable costs divided by quantity
Total Costs
Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Total Costs (TC)
TC = TFC + TVC
Average Variable Costs
Variable costs divided by the quantity of output
Average Total Costs
can be determined by dividing the firm's costs by the quantity of output it produces.
The average cost is the cost of each typical unit of product.
Average Fixed Costs (AFC)
Average Variable Costs (AVC)
Average Total Costs (ATC)
ATC = AFC + AVC = total co
Marginal Costs
the increase in total cost that arises from an extra unit of production. Helps answer the question: How much does it cost to produce an additional unit of output?
= (change in total cost) divided by (change in quantity)
The Production Function
shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.
-generally contains labor (L), capital (K), intermediate inputs and energy.
Marginal Product
the increase in output that arises from an additional unit of that input of any production process
Diminishing Marginal Product
is the property whereby the marginal product of an input declines as the quantity of the input increases.
EX: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amoun
Diminishing Marginal Product of Production Function Cont.
The slope of the production function measures the marginal product of an input, such as a worker.
When the marginal product declines, the production function becomes flatter.
Total Cost curve
Shows graphical relationship between the quantity a firm can produce and its costs determines pricing decisions
Cost curves and their shapes
The average total-cost curve is U-shaped.
At very low levels of output average total cost is high because fixed cost is spread over only a few units.
Average total cost declines as output increases.
Average total cost starts rising because average variabl
Diminishing marginal product
Rise of cost with the amount of output; each additional unit is more expensive than the previous
Efficient Scale
The quantity that minimizes average total cost. The bottom of the U-shaped ATC curve occurs at the quantity that minimizes average total cost
Relationship between Marginal cost and average total cost
Whenever marginal cost is less than average total cost, average total cost is falling downward.
Whenever marginal cost is greater than average total cost, average total cost is rising.
The marginal-cost curve crosses the average-total-cost curve at the ef
Typical Cost Curves have 3 important properties:
1. Marginal cost eventually rises with the quantity of output.
2. The average-total-cost curve is U-shaped.
3. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
Costs in The Long Run vs. The Short Run
Because many costs are fixed in the short run but variable in the long run, a firm's long-run cost curves differ from its short-run cost curves
In the short run, some costs are fixed.
In the long run, fixed costs become variable costs
Economies of Scale
refer to the property whereby long-run average total cost falls as the quantity of output increases.
Diseconomies of scale
refer to the property whereby long-run average total cost rises as the quantity of output increases.
Constant returns to scale
refers to the property whereby long-run average total cost stays the same as the quantity of output increases
Raj opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Raj has an accounting profit of _____and an economic profit of_________
a)
a) $50, $10
accounting: total revenue ($60) minus explicit costs ($10) = $50
economic: total revenue ($60) minus (explicit (10) + implicit ($40))= $10
Diminishing marginal product explains why, as a firm''s output increases,
a) the production function and total- cost curve both get steeper
b) the production function and total-cost curve both get flatter
c) the production function gets steeper, while the
d) the production function gets flatter, while the total-cost curve gets steeper
A firm producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total sot would rise to $5,008. What does this information tell you about the firm?
a) Marginal cost is $5, and average variable cost is $8
b) ma
b) marginal cost is $8, and average variable cost is $5
A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If it were to increase production to 21 units, which of the following must occur?
a) marginal cost would decrease
b)marginal cost would increase
c) average total cost
c) average total cost would decrease
The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result
a) average total cost and marginal cost
b) average total cost and average fixed cost
c) average variable cost and marginal cost
d) average v
b) average total cost and average fixed cost
if a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit _____of scale and ____average total cost
a) economies, falling
b) economies, rising'
c) diseconomies, falling
d) diseconomies, rising
d) diseconomies, rising
Profit
the firm's total revenue minus its total cost.