Econ 2023 1st Edition Lecture 12Outline of Last Lecture I. Indifferent curve.II. Arbitraush: a. Calculations.Outline of Current Lecture II. FirmsIII. TechnologyIV. Costsa. Short Runi. TC, TFC, TVCb. Long runi. TC(=TVC)c. Marginal Cost.Current LectureChapter 7: Cost and Market Structure (producers in the supply side)I. Producers behavior:a. Firms, organizations that produce goods and services.b. To produce goods and services, firms combine the factors of production-labor, capital, and natural resources- a “transformation” process.c. Economists assume that firms engage in production to earn a profit that they seek to make this profit as large as possible.d. Economists assume that firms apply the marginal decision rule as they seek to maximize their profits.e. The production choices of firms and their associated costs are at the foundation of supply. Example: choice of technology.II. Firms: organizations that produce goods and services using scares resourcesa. A “transformation” occurs during production as value is created by converting resources (labor, capital, and natural resources) into goods and services.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.i. The transformation process is a function of technology, the choice of technology depends on costs (input prices). b. Objective for firms: maximize (economic) profit:i. Profit (π) = total revenue (TR) – total (economic) cost (TC)ii. Marginal decision making is used to find the rate of output (quantity per period of time) that maximizes profit.III. Technology: creates more productivity and outputs.IV. Costs: varies with the rate of output. Output is function of quantities of inputs (technology) - Assume two inputs, Labor (L) and capital (K). Inputs are not free (they are scarce).i. Assume K is constant and L is adjustable. ii. Total cost (TC)= r×K + w×L (r×K = total FIXED costs (TFC)) (w×L = total VARIABLE cost (TVC)). b. Short run- “operational” decisions. At least one input (we assume capital, K) is fixed in quantity.i. TC = total costii. TFC = total fixed costiii. TVC = total variable cost1. The shapes of the total cost and total variable cost curves are important. Where the TC curve starts is total fixed cost. The TC curve then rises, but at a decreasing rate, up to the number on thegraph. Beyond that certain point the TC becomes steeper and steeper. The shape of the TVC curve follows the same pattern. 2. Initially there increasing marginal returns in production. Each unit requires less and less additional labor. a. In the range of diminishing marginal returns, each additional unit of a labor adds less and less to total output.Each additional unit of output requires larger and larger increases in the variable factor, and larger and larger increases in costs. The slopes of the two determine the Marginal cost (MC) of production. MC shows the additionalcost of each additional unit of output a firm produces.c. Marginal Cost= (change in) TC/ (change in) Q. Is the amount by which total cost rides with an additional unit of output.i. Shows the additional cost of each additional unit of output a firm produces.ii. Given the marginal decision rule’s focus on evaluating choices at the margin, the marginal cost curve is very important in the analysis of a firm’s choices.1. Since the TC curve inherits its shape from the TVC curve (they differ by the amount of TFC). MC is also the slope of the TVC curve. iii. Marginal cost falls over the range of increasing marginal returns; when total cost is increasing at a decreasing rate. Marginal cost rises over the range of decreasing marginal returns; when total cost is increasing at an increasing rate.d. Long run- “planning” decisions. Quantity of all inputs are flexible. Nothing is fixedso there are no fixed costs, aka are all variables. TC (= TVC)i. Average total cost (ATC) is total cost divided by quantity; firms total cost per unit of output. ATC= TC/Q.ii. Average variable cost (AVC) the firms variable cost per unit of output, is total variable cost divided by quantity. AVC= TVC/Q.iii. Average fixed cost (AFC) is the firms fixed cost divided by quantity. AFC=