Econ 1123 1st Edition Exam 2 Study Guide Lectures 10 17 Lecture 10 February 23 Concepts covered I II Outputs The short run A time frame in which the quantity of at least one factor of production is fixed some factors used by the firm are fixed in quantity i e technology buildings capital in the short run You can t just build a new factory in a week or even a month Note other factors used by the firm vary with output such as labor raw materials energy In the short run to increase output the firm must increase the quantity of variable factors it uses Fixed Factors Cannot be changed in the short run Variable Factors Production can be varied at any point The Long Run A time frame in which the quantities of all factors of production can be varied This means that the firm can change its plant size as well as the quantity of all its other factors in the long run Note long run decisions are not easily reversed Costs Looking at production and costs in the short run Total product x which is the maximum output that a given quantity of labor can produce Marginal Product of Labor the income in total product that results from a one unit increase in the quantity of labor employed with all other inputs remaining the same MPL Change in X Change in labor Average Product of Labor APL which equals total product divided by the quantity of labor employed APL stuff labor number of workers Labor Total Output MPL APL 1 30 30 1 30 2 70 70 30 2 1 40 70 2 35 3 120 120 70 3 2 50 120 3 40 4 160 40 160 4 40 5 190 30 190 5 38 6 210 20 210 6 35 This will give us a graph that shows how workers initially become more productive when they are increasing but after they increase too much they can become less productive perhaps from a loss of the space they need to work efficiently Note The line for the marginal will always intersect the average line at the highest point on the average line Note No table like this will be tested because Clark would rather us understand concepts than do arithmetic this is just to help your understanding As a business you care about this because you want peak productivity from your employees Lecture 11 February 25 Concepts covered In the long run ALL factors capital and labor are variable there are no fixed costs or fixed factors You will increase the amount yielded based on how many workers and how many machines Definitions Total Cost TC the cost of all factors of production Total fixed Cost TFC the cost of the firms fixed factors Fixed costs do not change with output Total variable cost TVC the cost of the firms variable factors Variable costs change with output Hence the reason they are called variable Total cost equals total fixed cost plus total variable cost or TC TFC TVC Marginal Cost MC The increase in total cost that results from a one unit increase in output MC change in TC change in X Average total cost total cost per unit of output AC TC x Average Fixed Cost AFC total fixed cost per unit of output AFC TFC x Average Variable Cost AVC total variable cost per unit of output AVC TVC x Lecture 12 March 2 Concepts covered The Characteristics of Pure competition In Competitive markets we have large numbers of independently action buyers and sellers So many in fact that no individual buyer or seller can really affect market price Homogeneous Products No real or imagined differences i e it s all asprin Firms can easily enter or exit the industry Perfect information concerning prices and products Perfectly mobile resources The Purely Competitive firm in short run equilibrium short run some resources are fixed capital but some are variable labor Operational objective of the owners and managers maximize profits or minimize losses rule for profit maximization or loss minimization marginal revenue marginal cost Marginal Revenue is the additional revenue a firm receives when it sells an incremental unit of output MR change in total revenue change in output If a company can make something for 8 dollars and sell it for 10 for a profit of 2 dollars they will do it If a company can make something for 9 99 and sell it for 10 dollars then they also will do that They will do this until no more profit can be made then they will stop because they want to avoid loss The competitive firm s marginal revenue schedule Note A firm is a price taker they have to take the price given by the market A firms demand will be perfectly elastic meaning a horizontal line for an individual firm How Large are the firms profits or losses average total cost TC q Total cost firms Short Run Profits and Average Total Costs Economic Profit Total Revenue TR minus Total Cost TC TR Revenue per unit x number of units q price per unit MR rectangular area Opaq Total Cost Total Cost per unit x number of units average total cost x number of units TC qaPO If TR TC they will have the exact same rectangle and that means 0 economic profit Zero economic profit does not equal zero accounting profit Recall Total economic costs Explicit Accounting Costs Opportunity implicit costs how much the firms capital and entrepreneurial talent could have earned if employed in an alternative line of production Zero econ profit positive accounting profits Accounting profits would be just high enough to keep capital and entrepreneurial talent in this line of production Definitions Marginal Cost the additional cost a firm incurs when it produces an incremental unit of output The Rule MR MC Lecture 13 March 9 Concepts covered I Economic Losses If price ATC you will have zero economic profit If price ATC positive economic profit If price ATC negative economic profit II Short Run Losses and Average Variable Costs Short run losses and average variable costs Rule The competitive firm will cease production shut down when price falls below the minimum average variable costs Will a firm always shut down if they aren t making a profit Not necessarily the firm may be staying in business to minimize losses by paying back the money for their factory or things like that III Firm and Market Supply in the short run Market supply sum of individual firms supply mc schedules You can derive the market supply graph from adding all of the firms mc schedules together Qo QAo QBo QCo If the firm has zero economic profits that implies that price average total cost Lecture 14 March 11 Concepts covered I Cost Industries Price for an individual firm is established by an industry and the firm is the price taker This Price is also the firms demand and marginal revenue schedule Note