Chapter 8 Summary THIS HALF OF THE SUMMARY IS ON EXAM 2 1 Profit maximizing firms make decisions to maximize profit TR TC 2 To calculate production costs firms must know two things a the quantity combo of inputs they need to produce their product b the cost of those inputs COSTS IN THE SHORT RUN p 168 3 Fixed costs are costs that DO NOT CHANGE w a firms output In the SR firms CANNOT avoid fixed costs or change them even if production is 0 4 Variable costs are those costs that depend on the level of output chosen Fixed costs plus variable costs equal total costs TC TFC TVC 5 Average fixed cost AFC is total fixed cost divided by the quantity of output As output AFC steadily b c the same total is being spread over a larger larger quantity of output This phenomenon is called spreading overhead AFC TFC q 6 Numerous combos of inputs can be used to produce a given level of output Total variable cost TVC is the sum of all costs that vary with output in the SR 7 Marginal cost MC is the in TC that results from the production of 1 more unit of output If a firm is producing 1 000 units the additional cost of output to 1 001 units is MC MC measures the cost of the additional inputs required to produce each successive unit of output B c FC fixed costs DO NOT CHANGE when output changes MC reflects only changes in VC variable costs 8 In the SR a firm is limited by a fixed factor of production or a fixed scale of a plant As a firm s output it will eventually find itself trapped by that scale B c o the fixed scale MC eventually s at an ing rate 9 MC in the slope of the TVC curve The TVC curve always have a positive slope b c TC always with output However MC means that TC ultimately at an rate 10 Average variable cost AVC TVC q 11 When MC is above AVC AVC is When MC is below AVC AVC is MC intersects AVC at AVC s minimum point 12 Average total cost ATC TC q It is also equal to the sum of AFC AVC 13 When MC is below ATC ATC is towards MC When MC is above ATC ATC is increasing MC intersect STC at ATC s minimum point THIS HALF OF THE SUMMARY IS ON EXAM 3 OUTPUT DECISIONS REVENUES COSTS AND PROFIT MAXIMIZATION p 178 14 A perfectly competitive firm faces a demand curve that is a horizontal line in other words perfectly elastic demand 15 Total revenue TR is simply price times the quantity of output that a firm decides to produce and sell Marginal revenue MR is the additional revenue that a firm takes in when it increases output by 1 unit 16 For a perfectly competitive firm MR is equal to the current market price of its product 17 A profit maximizing firm in a perfectly competitive industry will produce up to the point at which the price of its output in just equal to SR marginal cost P MC The more general profit maximizing formula is MR MC P MR in perfect competition The MC curve of a perfectly competitive firm is that firm s SR supply curve with one exception