Reviewed Short Run More labor More Output but the Marginal Product is diminishing because we fix other factors of production gives more output but not as much as the last person slope gets flatter Spend time on Paradox in the reading difficult Elasticity Midpoint utility maximization cost 3 different problem solving problems on exam need to know formulas Some Categories of Cost Fixed Costs don t D in the short run Variable Costs D over the short run Total Cost Fixed costs var costs Some Additional Categories Average Variable Cost VC Q Average Total Cost TC Q cid 127 Marginal Cost DTC DQ OR DVC DQ From Production to Costs Assume fixed costs of 500 Assume 10 per unit of labor Calculate FC VC TC AVC ATC and MC FIXED 500 all the time VC Labor 0 VC Q 10 20 20 35 30 45 and 40 50 TC Q 510 20 520 35 530 45 and 540 50 Dvc Dq 10 20 10 15 10 10 10 5 L 0 1 2 3 4 Q 0 20 35 45 50 FC 500 500 500 500 500 VC 0 10 20 30 40 TC 500 510 520 530 540 AVC 0 5 0 6 0 7 0 8 ATC 25 5 14 9 11 8 10 8 MC 0 5 0 7 1 0 2 0 Don t put zero in places of the dash do not leave empty show you know the formula Average chases the margin but never catches it Average follows the margin but doesn t increase as quickly think of it like average One really good semester doesn t pull up your whole average quickly average carries the past Margin only carries the increment history doesn t matter Profit Maximization From the market level to the firm level Market demand curve for corn looks at global production slopes directly downward quantity is in millions of bushels Family farm soybeans instead of corn doesn t change market insignificant relationship For the individual the demand curve is flat horizontal at the market price quantity is in hundreds of bushels MARKET NOT IMPACTED BY INDIVIDUALS Your role in perfect competition is tiny You are a price taker you accept whatever the market price is because you can t change it cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Imagine olympic sized swimming pool you re on the side with a bucket and teaspoon adding water If you leave will anyone notice No Profit Maximizing Rule cid 127 We assume all firms maximize profit cid 127 General Rule MC MR As MC and MR get closer as long as MR is higher keep doing it As soon as they match STOP Perfect Competition Rule MC MR P The average chases the margin the reason it matters if the margin is below the average it will go down and vice versa When the average and margin intersect the average stays still average does not change As long as the margin is below the average The average must fall when they intersect it stops falling when the margin increases the average will rise never as fast as the margin though GRAPH If we assume diminishing returns always have a rising cost curve cid 127 cid 127 cid 127
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