No entry or exit into the industry Small coffee shop 1 register 1 espresso size table space ALL FIXED labor coffee can be CHANGED example Honda new factory complicated to add takes a LONG time each year is a short run compared to the time it takes to build a factory No fixed factors of production new businesses can appear add more registers space espresso machines example Hot Dog cart If you decided things are already prosperous and you want two hot dog stands it would not be easy to get it up in one day but in a Firm Behavior Thinking about timeframe 1 Short Run At least one fixed factor of production Long Run Firms can enter and or exit couple is doable Friday is the long run Timeframe is context specific in economics 2 Costs You re in charge The boss has left you in charge Production schedule of 500 units All units have been committed to customers Average cost 200 per unit The phone rings A potential customer The caller will pay 450 for one unit Average cost for 501 units 201 cid 127 What should you do Call the boss and ruin her weekend NO Sell a unit to the caller but don t change output NO Tell the caller yes and boost production level Is accommodating the caller in the interest of the firm Tell the caller no Tell the caller yes Before the call Output 500 Average Cost 200 Total Cost 100 000 Total Cost 100 701 After the call Output 501 Average Cost 201 cid 127 Oops Focus on the margin cid 127 Marginal cost of increasing output is 701 cid 127 Marginal benefit of increasing output 450 The rational decision leave the output alone Rational decisions focus on the margin 3 Short Run Production cid 127 Marginal Cost 701 Total Change in cost divided by change in total output Labor Output Marginal Product Average 0 20 35 45 50 20 15 10 5 20 17 5 15 12 5 0 1 2 3 4 MP DQ DL Diminishing marginal product due to the fact that it is the short if there is one person working they can do what they want without coordinating one person could be waiting for the other therefore less productive cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 In the short eventually we will always encounter diminishing returns The longer we push something the less we get out THE FRUIT EXAMPLE You re gpa for one semester is the margin the average is your cumulative gpa The average chases the margin Graph that goes up and levels off slope is margin
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