Economics 1: Principles of microeconomicsLecture 14Wednesday, May 20, 2012Review: Theory of Firmo Categories of firms by ownership by market power Assume that the firm is profit maximized Profit = TR - TCPreview: Productiono Short runo Long run CostsProduction: the conversion of inputs to outputsInputs: Producer Process: Outputs:labor not just manufacturing final productnatural resources Can be storagecapital (machines, buildings | financial)Short run production: at least one of the inputs is fixed; day to day operationsUsually capital Culture w/ jobs for life --> then labor is the fixed inputLong run production: all inputs are variables; strategic planning decisionsHow easy is it going to be to change the inputs I haveLike a bball analogy: dribbling the ball is the long run production; one foot planted is the short run productionEconomics 1: Principles of microeconomicsLecture 14Wednesday, May 20, 2012No fixed time; asking how 'sticky' are the inputsFixed inputs: not able to change the amount that is being used over the observation periodUsually a factor of contractsVariable inputs: can change over the observation periodMARGINAL = ADDITIONALGarage Tune Up Shop Example:Variable Costs Labor Q (# of cars) AP: Q/LAverageProductMarginalProduct= ΔQ/ΔLFixed Costs0 0 0 X X 100100 1 25 25 25 100200 2 70 35 45 100300 3 120 40 50 100400 4 150 37.5 30 100500 5 170 34 20 10050 is the point of diminishing marginal product.More labor means increase in specialization.Point of diminishing marginal product: every additional unit of variable input adds less to total output than the unit before- When marginal product is at a maximumTotal outputQuantityPoint of diminishing marginal product The average is at a max when MP = APAP MPVariable inputEconomics 1: Principles of microeconomicsLecture 14Wednesday, May 20, 2012Average: what each worker does on averageMarginal: addition to the totalWhen MP is above AP, AP is increasingWhen MP below AP, AP is decreasing-Fixed costs are related to fixed inputs; stay fixed with changing outputExample: Costs of tools or the space you are renting-Rancible costs are related to variable inputs (they change when output changes)-Total cost = fixed costs + variable costsLabor Fixed cost Variable cost Total cost Averagecost:Averagefixed cost(AFC = FC/Q)Averagevariablecost: (AVC =VC/Q)Marginalcosts (MC =ΔTC/ΔQ)0 100 0 100 X X X1 100 100 200 4 4 42 100 200 300 1.43 2.86 2.223 100 300 400 0.83 2.5 2.004 100 400 500 0.67 2.67 3.335 100 500 600 0.59 2.94 5Q in the equation is taken from the Q values in the first table.-When marginal product reaches a maximum, marginal cost is at a minimum-When MC = AVC, AVC is @ a minimum-When MC = ATC, ATC is @ a minimumEconomics 1: Principles of microeconomicsLecture 14Wednesday, May 20, 2012$ MCATC min ATCAVCAVC
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