ECON 202 1nd Edition Lecture 21 Outline of Last Lecture I. Market Inefficienciesa. Public Goodsi. Market Demand CurveII. Business Costs and Productiona. Production Termsb. Law of Diminishing Marginal Productivityc. Product Curvesd. Cost MeasuresOutline of Current Lecture III. Business Costs and Productiona. Short Run Cost Curvesb. Product Curves and Cost Curvesc. Long Run Cost CurvesCurrent LectureBusiness Costs and ProductionShort Run Cost CurveExercise: Assume 1 variableinput at $1/unit. Total fixed cost is $5.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. AFC = TFC/QAVC = TVC/QATC = TC/QMC = ΔTC/ΔQQ$Units of VariableInputTotal VariableCostTotal Fixed CostTotal CostTotal Product (Q)Marginal ProductAverage ProductMarginal CostAverage VariableCost0 $0 $5 $5 0 - - - -1 $1 $5 $6 2 2 2 $0.50 $0.502 $2 $5 $7 5 3 2.5 $0.33 $0.403 $3 $5 $8 9 4 3 $0.25 $0.334 $4 $5 $9 13 4 3.3 $0.25 $0.315 $5 $5 $10 16 3 3.2 $0.33 $0.316 $5 $5 $11 18 2 3 $0.50 $0.33Notice: When Marginal Product is falling Marginal Cost is rising which means that Marginal Cost will slope up when we have Diminishing Marginal Productivity.Also: Average Variable Cost is U shaped – it falls then rises as Total Product increases-AP=QNumber of Units of Input, AVC=TVCQ=Number of units of input × priceQ therefore-AVC=Input PriceAP, therefore as Average Product increases Average Variable Cost decreases and vice versa- Why does AVC look like a “U”o Because Average Product looks like this Max MP and Min MC occur at the same placeMax AP and Min AVC occur at the same timeThe shape of the Short Run Cost Curves Reflect the Law of Diminishing Marginal ProductivityLong Run CostCurvesExample: A firms Long Run Average Cost Curve is the EVELOPE of its short run average total cost curvesEvery point on a Long Run Average Total Cost curve is a point on some Short Run Total Cost curveLong Run Cost CurveTotal ProductMarginal Product and Average ProductOutput (Q)Units of Variable InputAVCAPMPIncreasing Marginal ReturnsDiminishing Marginal ReturnsNegative Marginal ReturnsMCMin. AVCMin
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