Chapter 7Here 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 variousbuyers 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 onmore 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 taxesThe 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 therevenue 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 sizeof the deadweight loss.CHAPTER 13When 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 costsBy 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 obtainedfrom 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 quantityof 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 outputMarginal 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 ofoutput if total cost is divided evenly over all the unitsproduced. 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 occursat the quantity that minimizes average total cost.Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginalcost 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 scaleWhen 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 DefinitionMathematical DescriptionExplicit costsCosts that require an outlay of money by the firmImplicit costsCosts that do not require an outlay of money by the firmFixed costs Costs that do not vary with the quantity of output producedFCVariable costsCosts that vary with the quantity of output producedVCTotal cost The market value of all the inputs that a firm uses in productionTC = FC + VCAverage fixed costFixed cost divided by the quantity of output AFC = FC / QAverage variable costVariable cost divided by the quantity of outputAVC = VC / QAverage total costTotal cost divided by the quantity of output ATC = TC / QMarginal costThe increase in total cost that arises from an extra unit of productionMC = ΔTC / ΔQCHAPTER 14A 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 pricebecause many other sellers are offering milk that is essentially identical. Because each seller can sell all he wants at the going price, he has
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