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OU ECON 1123 - Exam 2 Study Guide

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Econ 1123 1st EditionExam # 2 Study Guide Lectures: 10-17Lecture 10 (February 23)Concepts covered:I. OutputsThe 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 aweek, 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 pointThe 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 reversedII. CostsLooking at production and costs in the short run:Total product (x), which is the maximum output that a given quantity of labor can produceMarginal 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 laborAverage Product of Labor (APL) which equals total product divided by the quantity oflabor employed. APL= stuff/ labor (number of workers)Labor Total Output MPL APL1 30 - 30/1= 302 70 (70-30)/(2-1)=40 70/2= 353 120 (120-70)/(3-2)=50 120/3= 404 160 40 160/4=405 190 30 190/5=386 210 20 210/6= 35This 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 lineNote: No table like this will be tested because Clark would rather us understand concepts than do arithmetic, this is just to help your understandingAs a business you care about this because you want peak productivity from your employeesLecture 11 (February 25) Concepts covered:In the long run ALL factors (capital and labor) are variable-> there are no fixed costs or fixed factorsYou will increase the amount yielded based on how many workers and how many machines.Definitions:Total Cost(TC)- the cost of all factors of productionTotal fixed Cost (TFC)- the cost of the firms fixed factors. Fixed costs do not change with outputTotal 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+TVCMarginal Cost (MC)- The increase in total cost that results from a one- unit increase in output MC=change in TC/ change in XAverage total cost- total cost per unit of output AC=TC/xAverage Fixed Cost (AFC)- total fixed cost per unit of output AFC=TFC/xAverage Variable Cost (AVC)- total variable cost per unit of output AVC=TVC/xLecture 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 resourcesThe 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 incrementalunit of output. MR= change in total revenue/ change in outputIf 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 alsowill do that. They will do this until no more profit can be made, then they will stop because theywant to avoid loss. The competitive firm’s marginal revenue scheduleNote: 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 firmHow Large are the firms profits (or losses)? -> average total cost=TC/q= Total cost/ firmsShort Run Profits and Average Total CostsEconomic Profit=Total Revenue (TR) <minus> Total Cost (TC) TR= Revenue per unit x number of units (q)=price per unit=MR=rectangular area – OpaqTotal Cost= Total Cost per unit x number of units = average total cost x number of unitsTC= qaPOIf TR=TC they will have the exact same rectangle and that means 0 economic profitZero economic profit does not equal zero accounting profit. Recall: Total economic costs= Explicit (Accounting) CostsOpportunity (implicit) costs= how much the firms capital and entrepreneurial talent could have earned if employed in an alternative line of productionZero econ profit-> positive accounting profitsAccounting 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 outputThe Rule- MR=MCLecture 13 (March 9)Concepts covered:I. Economic LossesIf price = ATC -> you will have zero economic profitIf price > ATC -> positive economic profitIf price<ATC -> negative economic profitII. Short Run Losses and Average Variable CostsShort run losses and average variable costs. Rule: The competitive firm will cease production (shut down) when price falls below the minimum average variable costsWill 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 thatIII. Firm and Market Supply in the short runMarket supply = sum of individual firms supply (mc) schedulesYou 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 costLecture 14 (March 11)Concepts covered: I. Cost IndustriesPrice for


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