SC ECON 221 - Final Exam Study Guide (13 pages)

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Final Exam Study Guide

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Final Exam Study Guide


This review covers the information from lectures 16 - 21.

Study Guide
University Of South Carolina-Columbia
Econ 221 - Prin of Microeconomics
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ECON 221 Final Exam Study Guide Lectures 16 21 Lecture 16 October 30 Production Understanding how firms can maximize profits o Profits Total Revenue Total Costs o Both revenue and cost depend on quantity produced Quantity produced depends on inputs Inputs Land Labor Capital Inputs Production Function Output o Net Benefit Total Benefit Total Cost Production function o Q F K L K L o Suppose capital K is fixed at K 1 and just think about changes in labor o Now we can draw total product curve o Total product TP curve represents relationship between total output and the quantity of one of the inputs while holding the other fixed o Diminishing returns each additional unit of input adds less to TP than the last each new person is a little less productive than the one before o Marginal product of labor How much more we can produce if we hire one more worker MPL Change in Q Change in L o Realistic Total Product Curve Often realistic for TP to be upward sloping in the beginning but still for the most part diminishing returns to labor o Production Function Q K L describes our relationship between inputs and outputs Our goal to understand profits Profit TR Q K L TC Q K L Revenue is just price times quantity TR Q K L P Q K L Total cost consists of fixed cost and variable cost Fixed Cost cost of fixed inputs or inputs that firms cannot change in the short run Variable Cost Cost of variable inputs inputs that firms can change any time o VC entirely depends on Q o So TC Q K L FC VC Q K L o Total cost has to be a function of how much is being produced Example A pizza shop has to decide at the beginning of the year how many ovens to rent for 10 000 but can hire workers at any time for 20 000 Here ovens are a fixed cost and workers are a variable cost So if they rent one oven and hire two workers TC 10 000 2 20 000 o Here capital ovens was fixed and labor was variable o All inputs are variable in the long run o In the short run most things will be fixed o Total Cost Close relationship between total cost and total production Ex Wages 20 000 Oven 10 000 Rent one oven workers can vary TC MC Summary o Total cost curve plots relationship between output and total cost o For most of the curve because of diminishing returns to inputs as we increase output each additional unit costs more to produce o That is for most of the curve marginal costs are increasing Average total costs o ATC TC Q Whereas marginal cost measures how much one more unit costs to produce average total cost measures how much each unit costs on average Lecture 17 November 6 Production Continued and Perfect Competition Big goal Understand how prices and quantities are determined when markets aren t perfectly competitive Understand how firms react to different types of competition monopoly oligopoly Build a more detailed model how individual firms o Total product curve relationship between Q and a factor of production usually labor holding other factors fixed o Firms will maximize profits by choosing Q such that MR MC o Defining characteristic for the most part diminishing return to labor or other factor Demonstrated by Marginal product curve of labor MP Change in output change in labor o Total cost curve relationship between output and cost TC FC VC o Defining characteristic for the most part increasing marginal costs Demonstrated by Marginal cost curve MC change in cost change in output Average total cost curve ATC total cost total output MC always intersects ATC at minimum of ATC Average Total Cost ATC TC Q So TC ATC Q Just like Total Revenue TR P Q Short run vs Long run costs Thus far holding the fixed input fixed short run Long run all inputs are variable Over time a firm can adjust its fixed cost buy more capital to accommodate the amount it expects to produce What happens when you expand capital o Higher fixed costs Spend to rent upkeep new machines factories etc o But potentially lower variable costs More capital yields more room for workers to be more productive lowering costs Varying fixed costs o At low levels of output increasing fixed inputs can lead to lower minimum ATC Increased possibilities of specialization Called Increasing Returns to Scale o Eventually increasing fixed inputs leads to higher minimum ATC Decreasing Returns to Scale Difficult to maintain manage o Always choose the ATC curve that gives you the lowest cost for the amount you are willing to produce o Illustrated by long run average total cost curve LRATC General questions for the next few lectures o Firm behavior and consequences How much to produce in order to maximize profits What impact does firms profit maximizing behavior have on the market Depends on the market structure we are talking about Number of sellers Identical products Market structure o Perfect competition Many buyers Many sellers o Monopolistic competition o Oligopoly o Monopoly Profit maximization choose Q where MR MC o Profit TR K L TC Q K L o A firm wants to produce one more unit of a good if it will add profit o That is increase production if TR Q 1 TC Q 1 TR Q TC Q TR Q MR Q TC Q MC Q TR Q TC Q MR Q TC Q TR Total Revenue TC Total Cost MR Marginal Revenue MC Marginal Cost o So for PC firms produce more if P MC Q stop at the Q where P MC Q Perfect competition o Many buyers and sellers o Selling identical products o Free entry exit of firms o Seller and Buyers are price takers Firm is a price taker firm can t impact prices The firm always receives the market price when it sells a unit of a good MR always price regardless of quantity produce for perfectly competitive firms Lecture 18 November 11 Monopolies A market with a single seller Product does not have close substitute Barriers to entry can t just jump into market o Control of a scarce resource o Government Patents copyrights etc Consider the alternative Natural Monopolies o Natural Monopolies More effective to only have one company producing something Ex Phone lines cable television Very high fixed costs but low cost of increasing output once fixed costs are paid Increasing returns to scale across all reasonable levels of production Cheaper for one large firm to provide for the entire market vs two smaller ones Very difficult for smaller firms to compete De Beers Diamonds Exampleo Diamonds are expensive o Not physically scarce but sellers are making them scarce o People with access to the diamond deposits banded together to form De Beers o This kept quantity sold low and prices high How to maximize profits in perfect competition o

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