ECON 1101 1st Edition Lecture 24Outline of Last Lecture II. Consumer TheoryIII. Theory of the Firma. Costsb. U Shaped Average Costc. Constant Return to Scaled. Economics of Scalee. Short-run supply of a firmOutline of Current Lecture IV. Diminishing Marginal ReturnsV. Economies of ScaleCurrent LectureThe more you make average cost goes downTC=aQ^2 + bQ + C]A b and C are parametersDifferent countries have different parametersC= fixed costb = variable cost that is proportionate to outputA= when positive, A is increasing marginal cost (diminishing returns)Average total cost falls then decreasesit Is GOOD to keep producingAdd expensive/high units raise average costConstant returns to scale = line is horizontalIncreasing returns to scale = line is decreasingDecreasing returns to scale = line is increasingConstant returns to scale cost doesn’t change MC + ATC 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.Example where economies of scale is most important:pharmaceuticalssoftwarejumbojetdiscount retailingMarket Price > 1 then selltake P(price) as givenMarginal Revenue how much money you bring in MR = profit Compare with marginal cost. Quantity at which MC = MR is profit maximizing quantityProfit CANNOT be maximized if MC>MR (produce less)MR>MC (produce more)MC=MR!!!!!Rule for profit maximizing:MR=MCdistinct between short and long termShort term: fixed cost CANNOT be
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