Chapter 7 Here the term cost should be interpreted as the painters opportunity cost It includes the painters out of pocket expenses for paint brushes and so on as well as the value that the painters place on their own time Producer Surplus is the amount a seller is paid minus the cost of production Producer surplus measures the benefit sellers receive from participating in a market the area below the price and above the supply curve measures the producer surplus in a market If an allocation of resources maximizes total surplus we say that the allocation exhibits Efficiency If an allocation is not efficient then some of the potential gains from trade among buyers and sellers are not being realized In addition to efficiency the social planner might also care about Equality that is whether the various buyers and sellers in the market have a similar level of economic well being The use of agricultural pesticides for instance affects not only the manufacturers who make them and the farmers who use them but many others who breathe air or drink water that has been polluted with these pesticides Such side effects called externalities cause welfare in a market to depend on more than just the value to the buyers and the cost to the sellers Market power and externalities are examples of a general phenomenon called market failure the inability of some unregulated markets to allocate resources efficiently The effect of taxes The change in total welfare includes the change in consumer surplus which is negative the change in producer surplus which is also negative and the change in tax revenue which is positive When we add these three pieces together we find that total surplus in the market falls by the area C E Thus the losses to buyers and sellers from a tax exceed the revenue raised by the government The fall in total surplus that results when a tax or some other policy distorts a market outcome is called the Deadweight loss The area C E measures the size of the deadweight loss CHAPTER 13 When Caroline pays 1 000 for flour that 1 000 is an opportunity cost because Caroline can no longer use that 1 000 to buy something else Similarly when Caroline hires workers to make the cookies the wages she pays are part of the firm s costs Because these opportunity costs require the firm to pay out some money they are called explicit costs By contrast some of a firm s opportunity costs called Implicit Costs do not require a cash outlay Imagine that Caroline is skilled with computers and could earn 100 per hour working as a programmer For every hour that Caroline works at her cookie factory she gives up 100 in income and this forgone income is also part of her costs The total cost of Caroline s business is the sum of the explicit costs and the implicit costs Economic Profit the firm s total revenue minus all the opportunity costs explicit and implicit of producing the goods and services sold Accounting Profit the firm s total revenue minus only the firm s explicit costs This relationship between the quantity of inputs workers and quantity of output cookies is called the Production Function Marginal Product of any input in the production process is the increase in quantity of output obtained from one additional unit of that imput Diminishing Marginal product Notice that as the number of workers increases the marginal product declines The second worker has a marginal product of 40 cookies the third worker has a marginal product of 30 cookies and the fourth worker has a marginal product of 20 cookies Fixed costs costs that do not vary with the quantity of output produced Variable costs costs that change as the firm alters the quantity of output produced Average total cost Total cost divided by the quantity of output Average fixed cost is the fixed cost divided by the quantity of output Average variable cost is the variable divided by output Marginal cost total cost rise when the firm increases production by 1 unit of output Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced Marginal cost tells us the increase in total cost that arises from producing an additional unit of output Efficient scale the bottom of the U shape occurs at the quantity that minimizes average total cost Whenever marginal cost is less than average total cost average total cost is falling Whenever marginal cost is greater than average total cost average total cost is rising The marginal cost curve crosses the average total cost curve at its minimum Marginal cost eventually rises with the quantity of output The average total cost curve is U shaped The marginal cost curve crosses the average total cost curve at the minimum of average total cost When long run average total cost declines as output increases there are said to be Economies of scale When long run average total cost rises as output increases there are said to be Diseconomies of scale When long run average total cost does not vary with the level of output there are said to be Constant returns to scale Term Definition Mathematical Description Explicit costs Costs that require an outlay of money by the firm Implicit Costs that do not require an outlay of money costs by the firm Fixed costs Costs that do not vary with the quantity of FC output produced Variable Costs that vary with the quantity of output VC costs produced Total cost The market value of all the inputs that a firm TC FC VC uses in production Average Fixed cost divided by the quantity of output AFC FC Q fixed cost Average variable cost Average total cost Variable cost divided by the quantity of AVC VC Q output Total cost divided by the quantity of output ATC TC Q Marginal The increase in total cost that arises from an MC TC Q cost extra unit of production CHAPTER 14 A COMPETITIVE MARKET sometimes called a perfectly competitive market has two characteristics There are many buyers and many sellers in the market The goods offered by the various sellers are largely the same As an example consider the market for milk No single consumer of milk can influence the price of milk because each buyer purchases a small amount relative to the size of the market Similarly each dairy farmer has limited control over the price because many other sellers are offering milk that is essentially identical Because each seller can sell all he wants at the going price he has little reason to charge less and if he charges more buyers will go elsewhere Buyers and sellers
View Full Document
Unlocking...