Micro Ch 13 1 Diminishing MPL a Marginal product of any input declines as the quantity increases b This is caused by fixed inputs land or capital 2 Farmers Katie and Jake a Pay 1000 per month for the land b Market wage 2000 a month 3 Total Cost Associated with producing one additional Q 4 Cost a Fixed cost FC do not vary with the quantity of output i Example cost of land ii Usually it is rent or cost of equipment b Variable Cost VC vary with the quantity produced i Input costs ii Labor costs c Total Costs Fixed Cost Variable Cost d Average total cost Total Cost Quantity e TC Q FC Q VC Q ATC AFC AVC 5 Marginal line always intersects the average at average lines lowest point a MC intersects ATC at its minimum b ATC is V shaped c Short run land and or capital machines 6 Three factory types Small Medium and Large a Economies of Scale EOS when you become more efficient as you get larger i Example Wal Mart b Constant Returns to Scale larger you get but don t improve efficiency c Diseconomies of sale Coordination problems too large 7 Firm s goal is to maximize profit a TT Profit Total Revenue TR Total Costs TC b Total Revenue the amount a time receives from the sole of its output c Total Costs the market value of the inputs a firm uses in production d Total Costs include explicit and implicit cost Implicit costs that do not require paying out money i Explicit costs that require paying out money ii iii Example need 100 000 to start a company interest rate is 5 1 Case 1 borrow 100k explicit interest cost 5k 2 Case 2 used 40k of savings borrowed 60k would make 2k from 40k in interest would pay 3k in interest for 60k that was borrowed Implicit would be 2k because instead of gaining the interest she never gained it because she used the money on her business this would be implicit cost 3k would be explicit iv Example 1000 from savings earning 3 had to borrow 2000 at 7 1 What are John s implicit and explicit financial costs 2 Accounting TT TR Total explicit costs 3 Economist TT TR TR explicit and implicit costs v Example Katherine earns 15 hour teaching piano 1 Spends 5 hrs planting 50 worth seeds in her garden she can sell them for 150 2 Acct TT 150 50 100 3 Econ TT 150 50 15x5 25 8 Production Function Shows the relationship between the quantity of inputs used and quantity of outputs produced a Example Jake and Katie 5 acres of land 9 Marginal Product of Labor MPL increase in output from one additional unit of labor 10 Diminishing MPL land or capital machines being fixed
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