Edited with the trial version of Foxit Advanced PDF Editor To remove this notice visit www foxitsoftware com shopping ECO2030 st 1 Edition Final Exam Study Guide Lectures 29 33 Total Revenue amount a firm receives for the sale of its output QxP Total Cost the market value of the inputs a firm uses in production materials labor rent etc Profit total revenue minus total cost Know difference between revenue and profit Marginal Revenue and Marginal Profit are the difference when one additional unit of a good is produced Costs as opportunity cost what you give up to get something Firm s cost of production includes all the opportunity costs of producing goods Explicit Costs input costs that require an outlay of money by the firm write a check supplies loan payment etc Implicit Costs Costs that do not require an outlay of money Implicit Costs are ignored by accountants Included by economists because they are interested in decision making Things like money that could have been earned through another job or interest from money in bank Total Costs Explicit Costs Implicit Costs for economists Economic profit is always Accounting profit due to the inclusion of Implicit costs Economic Profit Total Revenue Total cost Explicit Implicit Accounting Profit Total Revenue total Explicit Costs Production Function the relationship between quantity of inputs used to make a good The production function levels out quickly at some point the additional worker makes very little difference in output so Curve becomes flatter Marginal product the increase in output from an additional unit of production represented by the slope of the production function Diminishing Marginal product marginal product of an input declines as the quantity of the input increases e g more workers There is a strain on the factors of production mainly labor eg Overcrowding effect Total Cost Curve the relationship between output and total costs Cost increases as output increases at some point the cost curve gets very steep The result is Diminishing Marginal Product same reason as for the production function Fixed cost costs that do not vary with quantity of output eg factory rent etc You can recognize fixed cost easily because it does not change with quantity output fixed costs are fixed they are constant on a graph and they exist even when output is 0 Variable cost Costs that change depending on quantity output Often depends on the amount of workers Total Costs TC Fixed cost Variable cost Average Fixed Cost AFC Fixed Cost quantity of output Average Variable Cost AVC Variable Cost quantity of output Average Variable Costs increase with Quantity output Average Fixed Costs decrease with Quantity output Marginal Cost increases as quantity increases MC and the ATC always cross at the ATC curves lowest point ATC Curve is U shaped This is because anything lower than the average will bring the cost down and vice versa think about the GPA example When MC ATC the average Total Cost is Falling When MC ATC the average total cost is rising Remember 3 Key things 1 Marginal cost rises with the quantity of output 2 The average total cost curve is U shaped 3 The marginal cost curve crosses the average total cost curve at the minimum of average total cost Costs in the Short and Long Run Fixed in the short run Firms have less flexibility Variable in the long run firms have more flexibility ATC decreases as workers specialize and improve in the beginning short run this levels off and then ATC increases in the long run due to distribution and management issues costs Short run economies of scale from Specialization Long run diseconomies of scales from increasing coordination problems As a result firms try to duplicate themselves Build another firm Firms in competitive markets Competitive market is many buyers and sellers Trading Identical products Each buyer and seller are price takers Firms have to accept price or go out of business Firms can easily exit and enter the market Revenue of a competitive firm Total Revenue Price x Quantity So Marginal Revenue Price Average Revenue for a competitive firm Total revenue divided by the quantity sold Price Marginal Revenue Average Revenue Rules for maximizing profit want to produce quantity where total revenue total costs is biggest If MR MC should increase production IfMR MC should decrease production If MR MC profit is maximized Price Average Revenue Marginal Revenue good to remember this When Should a firm Shutdown eg Close a store at night Shutdown A short run decision to not offer services produce goods decision of when to shut down for a certain amount of time which depends on the market conditions during the time a firm decides to shut down Firms decision depends on TR and VC Shutdown if TR VC for that period of time Stay open if TR VC for that period of time In the Short run a competitive firm s supply curve S is the same as its Marginal Cost Curve MC Sunk Cost a cost that has already been spent and cannot be recovered e g Bulk supplies factory rent factory technologies etc When Should A Firm Exit the Market In the long a firm needs to decide if it needs to exit the market this decision is based on TR and TC needs to include the fixed costs as well A firm should exit if Revenue than Total Costs Exit if TR TC this is the same as P ATC A firm should Enter if TR TC or if P ATC Note we include both fixed and variable costs in this decision Measuring Profit if P ATC profit Profit TR TC P ATC xQ if P ATC loss Loss TC TR ATC p xQ negative profit You can just do the area of the rectangle to get the profit but know the above methods to calculate it without the presence of the graphs Since the Price is the ATC profit is negative meaning there is a loss Profit maximization Long run Exit if TR TC or P ATC Enter if TR TC or P ATC Long Run Process of entry and exit only ends when economic profit 0 in the Long run profit 0 or P ATC Remember this includes the implicit costs so accounting profit would be positive In the Long run the Supply curve is perfectly inelastic horizontal Increase in Demand in the short run higher quantity sold higher price P ATC positive economic profit This is a result from the demand curve shifting right Long run Firms will enter the market because P ATC and the price will decrease back to the Minimum ATC where profit 0 Quantity still increases because of new firms in the market As you can see in the long run the price 0 because new firms enter the market Why Monopolies arise Monopoly firm that