ECON 110 -001Exam # 3 Study Guide Lectures: 16-21Lecture 16 — October 21st The Production ProcessThe production process- The dependent on the technology avail- Can be translated into more precise- mathematical- termsThe production function—for a given production technology the production function tells us how much output you can get from a particular combination of inputs. The central actor is the firm.Firms are a way of organizing resources to provide goods and services to a market or an organization specializing in the production of some good or service .- They engage in production. - Production is a transformation process in which inputs are transformed into outputs. - Their goal is to always maximize profit.What is profit? - Profits = Total Revenue – Total Costs o Revenue = Price X Quantity (this can be obtained from the demand curve as well.) o Costs: Two types  Explicit costs (paid to others) Implicit costs (opportunity costs to owners)Lecture 17—October 23rd Explicit costs are a direct exchange or revenue. Implicit costs are not physical money, e.g. time, space, opportunity costs.NOTE: Opportunity costs is not synonymous with implicit costs because opportunity costs include explicit costs as well.The production function is represented by Q = f (K,L) WhereK = Capital: non-human productive resourcesL = Labor: human resourcesTime is a key element in the process, which affects the ability of the firm to control its decisions· The short run: a period in which at least one or more of the inputs used cannot be changed.o Fixed inputs imply fixed costs; they cannot be adjusted.o Variable inputs imply variable costs, which can be controlled by firms.· The long run: a period in which all of the inputs used in the production can be changed.· NOTE: we cannot measure these runs in calendar time.Total product: measure of the production function--how much output you can get from the inputs.Marginal product: How much extra output do you get from an additional unit of the (variable) input.· Marginal Product (MP) = ∆Q/∆L (Change in output/change in labor used)· Law of Diminishing Marginal Product: As you continue to add units to the amounts of input, you will actually decrease your marginal product.Average Product: Average Product = Q/L (Quantity of output/quantity of labor)Production costs are all of the opportunity costs faced by the owners of the firm i.e. all they must forego to produce their output.Two basic types of costs: 1. Explicit costs: actual payments made to others who supply inputs to the firm. 2. Implicit costs: (opportunity) costs faced by owners who must forego some payment or returnLecture 18 — October 28th Average total costs: Average variable costs + Average fixed costsAverage variable costs = Variable cost / units of output Typically rises as output rises (Law of diminishing marginal product)Average fixed costs = fixed cost / units of output Declines as output risesMarginal Cost = Change in total cost / Change in output OR Change in variable cost / change in output Caused by a change in variable costs ∆TC / ∆Q OR ∆VC / ∆QIn terms of graphing, these types of costs have certain relationships: The Long Run- Decreases the rate at which ATC rises. - The long run graph can be built by connecting many different short run graphs over time.o There are three parts to the long run curve:1) Economies of scale: When the long run average total cost (LRAC) falls as the quantity of output increases (In mathematical terms, this occurs when the LRAC curve slope is negative.)2) Constant returns to scale: When the LRAC remains unchanged as the quantity of output changes. (In mathematical terms, this occurs when the slope of the LRAC curve is zero.)3) Diseconomies of scale: When the LRAC rises as the quantity of output increases, (when the LRAC curve slope is positive.)  When Marginal cost (MC) is less than the average total cost (ATC), ATC is falling. When MC is greater than the ATC, the ATC is rising.  Therefore, ATC is at a minimum where the MC curve intersects with the ATC curve. All of that is true for the relationship between MC and the average variable cost (AVC) as well. Notice that as MC rises, the average fixed cost (AFC) continues to fall. You can see in this graph that the long run curve connects the low points of theshort runs of different production possibilities.   Lecture 19 — November 4th Market Structure has several parts:- Market Participants (buyers and seller)- Entry Conditions (as well as exit conditions)- Product Characteristics- Information CharacteristicsPerfect Competition, a type of market structure- There are many buyers and sellers- Entry and exit is easily performed- The goods are identical (also known as homogenous products) Both buyers and sellers are price takers.Price Taking is either when an investor’s buying or selling transactions are assumed to have no effect on the market, or a firm’s rate of production and sales change without significantly affecting themarket price of its product.In perfect competition (where all buyers and sellers are price takers,) no one market participant can determine the market price.Lecture 20 — November 6th Competitive Markets- Price will equal the marginal revenue - In order for there to be a profit, marginal revenue must be greater than marginal cost. Marginal Revenue: The additional amount of revenue received when an additional unit is sold. (MR = ∆R /∆Q)Maximizing ProfitProfit = total revenue - total cost If revenues rise by more than costs, profit increases: this means that MR > MC Marginal Costs = ∆Costs / ∆QuantityTo maximize profit, a firm should find where MR = MC.Average revenue = total revenue / quantityAverage total cost = total cost / quantityIn the Long RunEquilibrium in the long run means that there is no overall economic profit; that way, no firms are encouraged to join or exit the market.LRE: Price = the minimum average total cost.Lecture 21 — November 11thOverall Review Chapter 13- Costs and profit- Production and cost relationships o Production functiono Short run and diminishing marginal product o Short run and cost curveso Long run and cost curves (economies/diseconomies of scale)Chapter 14- Market structures - Perfect competitiono Price-taking firmso May buyers and sellersIn this graph, maximum profit is when the blue line,