*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 asmuch as the last person….slope gets flatterSpend time on Paradox in the reading- difficultElasticity (Midpoint), utility maximization, cost- 3 different problem solving problems on exam- need to know formulasSome Categories of Cost• Fixed Costs: don’t ∆ in the short run• Variable Costs: ∆ over the short run• Total Cost: Fixed costs + var. costsSome Additional Categories• Average Variable Cost: VC/Q• Average Total Cost: TC/Q• Marginal Cost: ∆TC / ∆Q OR ∆VC / ∆QFrom Production to Costs• Assume fixed costs of 500$• Assume 10$ per unit of labor• Calculate FC, VC, TC, AVC, ATC and MCL Q FC VC TC AVC ATC MC0 0 500 0 500 -- -- --1 20 500 10 510 0.5 25.5 0.52 35 500 20 520 0.6 14.9 0.73 45 500 30 530 0.7 11.8 1.04 50 500 40 540 0.8 10.8 2.0FIXED= 500 all the timeVC= Labor * !0$VC/Q= 10/20, 20/35, 30/45, and 40/50TC/Q= 510/20, 520/35, 530/45, and 540/50∆vc/∆q= 10/20, 10/15/ 10/10 10/5Don’t put zero in places of the dash—do not leave empty— show you know the formulaAverage chases the margin but never catches itAverage follows the margin but doesn’t increase as quickly- think of it like averageOne really good semester doesn’t pull up your whole average quickly- average carries the pastMargin only carries the increment—history doesn’t matterProfit MaximizationFrom the market level to the firm level….Market demand curve for corn…looks at global production..slopes directly downward…quantity is in millions of bushelsFamily farm…soybeans instead of corn…doesn’t change market…insignificant relationshipFor the individual, the demand curve is flat…horizontal…at the market price…quantity is in hundreds of bushelsMARKET NOT IMPACTED BY INDIVIDUALSYour role in perfect competition is tinyYou are a price taker, you accept whatever the market price is because you can’t change itImagine olympic sized swimming pool…you’re on the side with a bucket and teaspoon, adding waterIf you leave will anyone notice? NoProfit Maximizing Rule• We assume all firms maximize profit• 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 = PThe 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 changeAs long as the margin is below the average…The average must fall…when they intersect it stops falling….when the margin increases, the average willrise…never as fast as the margin though…GRAPHIf we assume diminishing returns…always have a rising cost
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