ECON 203 1st Edition Lecture 4Outline of Last Lecture I. Total Use ValueII. Marginal Use Valuea. Principle of diminishing marginal valueIII. Decision ruleIV. Demand curvea. MV > PV. First law of demandVI. Demand curve shiftsOutline of Current Lecture I. Marginal CostII. Decision Rulea. Use of the decision ruleIII. First Law of SupplyIV. Ceteris Paribus Conditions for SupplyCurrent LectureI. The principle of rising marginal cost a. The higher the rate of production, the higher the marginal cost of producing an addition unit of output.Example: Moving documents across the countryII. Marginal cost a. We go about calculating it the same way additional cost associated with These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.producing one additional unit of output. For example, TC for 3 units is $9. TC for 4 units is $16. The MC of producing the 4th unit is $16 - $9 or $7. That is, the additional cost of producing the 4th unit is 7.III. Assert decision Rule a. Firms choose to produce at a rate such that marginal cost is equal to the price of the good.Suppose that the price is $7. We assume that firm maximizes profits. Somehow, we know what the total costs of production are for all the various units of output. From this information, we can calculate MCIV. Does our decision rule make sense?a. We assume that the firm strives to maximize profits. Thus, our decision rule would make sense if the by picking the output where P = MC, firms also maximized profit. This is true. To see this, some more calculations, and fill in the last two columns of the chart.V. Revenue is defined as price * quantity produced. (Price is assumed to be $7 initially). Profit is = Total Revenue - Total Costsa. Our decision rule says that firms will select an output where MC is just equal to P.Price is $7, and we find that MC = $7 at an output of 4. The firm produces 4 units of output, given it a profit of $12. This is the best the firm can do. It makes sense.VI. Derive the supply curve, using our decision rule We found above, when p = $7, q=4. When p=$5,firms pick the quantity where P=MC. $5=P=MC at 3 units. Thus, when p=$5, q=3. When p = $3, q = 2.a. Thus, in the same way that a marginal value curve is a demand curve, a marginal cost curve is a supply curve. At each price, the MC curve tells us how many units the firm will supply. I can plot the MC curve, and it is the same as the Supply curve.b. Below: the MC curve and the Supply curve.VII. The height of a MC (Supply) curve at any given quantity Q is the marginal cost of producing the Qth unit.VIII. First Law of Supply – Holding other relevant factors constant (ceteris paribus), the higher the price of a good, the greater will be the quantity supplied. (Supply curves are upward sloping).IX. Ceteris Paribus Conditions for Supplya. Input prices -Rise in input prices -Fall in input pricesb. Technology -Increases in technology -Decreases in technologyc. “Z vector” – everything else of relevanceX. Changes in ceteris paribus conditions imply shifts of the entire supply curve.a. Changes in the “own price” imply movements along a given supply curve imply “changes in quantity supplied”.XI. At any particular price, the firms will be willing to supply fewer units. The higher MC implies a reduction in supply. A decrease in input prices causes a decrease in the MC of production. This is an increase in supply. At any particular price, the firms will be willing to supply more units. The lower MC implies an increase in supply.XII. An improvement in technology a. Improvements in technology is defined as cases where marginal costs are lower due to the technological change. Thus, an improvement in technology is logically the same as a decrease in an input price. Thus, it leads to an increase in supply.XIII. Deterioration in technology a. deteriorations in technology are defined as cases where marginal costs are higher due to the change.b. Thus, these are analogous to an increase in an input price, and thus lead to adecrease in supply.XIV. “Z vector” - everything elsea. e.g. floods, drought, bumper cropsA flood or drought might decrease the supply of corn. A freeze would decrease the supply of oranges. A bumper crop of corn would increase the supply of corn. A law that made it illegal to produce marijuana would decrease the supply of