Microeconomics NotesBrian Park1/9/13- Supply of good markets comes from firms- Supply of factor markets comes from households- Profito Total Revenue – Total Cost (accounting profit)o Total Cost = explicit cost + implicit cost (economic profit) Opportunity costo Deciding factor of how much to supply for producerso Ex.Current Job: $50,000Projected total revenue of new business: $100,000Explicit costs: $40,000Accounting profit: $100,000 - $40,000 = $60,000Total opportunity cost: $40,000 (explicit) + $50,000 (loss from current job)= $90,000Economic cost (total revenue – total opportunity cost): $10,000- Revenueo Total Revenue = price x quantity (if output is all same price)o Total Revenue = P1Q1 + P2Q2 + P3Q3 (If output is different prices)o Average Revenue = total revenue / quantity sold AR is just “price” if all output is sold at the same price When output is sold at different prices, AR is measure of average priceo Marginal Revenue = change in revenue / change in quantity MR < P when you have to lower price to sell more Can be negative (bringing in less money even though selling more) MR = output effect + price effect- Output Effect = Pnew x change in quantity- Price Effect = (Pnew – Pold) x Qold1/10/13- Total Cost = TC = TC(q)o Total cost is a function of quantity- Costs can be either fixed or variableo Total Fixed Cost = TFC = constant Constant regardless of output changeo Total Variable Cost = TVC = TVC(q) Changes as output changeso Total Cost = TFC + TVCo “Lumpy” cost--o MC(q1,q2) is usually represented as MC(q2)-- What is the relationship between average cost and marginal cost?o ATC > MC  ATC decreasingo ATC < MC  ATC increasing1/14/13Production QuantityTotalCost (TC)Total Fixed Cost (TFC) Total VariableCost (TVC)AverageTotal Cost (ATC)AverageFixed Cost (AFC)AverageVariableCost (AVC)MarginalCost (MC)0 $15 15 0 N/A N/A N/A N/A1 25 15 10 25 15 10 $102 $33 15 18 16.50 7.50 9 83 42 15 27 $14 5 9 94 55 15 40 55/4 3.75 $10 135 70 15 55 14 3 11 $156 88 15 $73 88/6 2.50 73/6 18- Production functiono Economic terms: production scale = capitalQuantity of Labor(Number ofWorkers)Units Produced(Quantity)Marginal Productof Labor (MPL)Average Product ofLabor (APL)0 0 N/A N/A1 10 10 102 18 8 43 24 6 24 28 4 15 30 2 .4o Marginal Product of Labor “law of diminishing returns” Additional output generated by an additional unit of labor- All other factors of production held constant- Marginal product can be defined for other inputs of production (capital, etc.)o Average Product of Labor APL = MPL / Lo Diminishing Marginal Product of Labor Principle that states that marginal product of labor declines as more units of labor are added- Capital is generally also subject to diminishing marginal product1/16/13o Is it always cheaper to be bigger? Economies of scale: when average cost decreases as quantity increases (i.e. bigger is cheaper) Diseconomies of scale: when average cost increases as quantity increases (i.e. smaller is cheaper)o Increasing returns to scale: twice as much of ALL inputs produces more than twice asmuch outputo Decreasing returns to scale: twice as much of ALL inputs produces less than twice as much outputo Constant returns to scale: twice as much of ALL inputs produces exactly twice as much outputProfit maximization- Profit is maximized at the quantity where marginal revenue equals marginal cost- There could be multiple points where MR = MCo Always maximize, not minimize profitCompetitive markets- Many buyers and sellers- (nearly) identical products- Free entry and exit- Set a MR = MC such that in competitive markets, MR = Po Set q such that P = MC- The symbol “*” is used for optimal/maximum/etc.- Capital “Q” is used for entire market, small “q” is used for one company/firm- “π” is used as profit1/17/13- Firm’s profit maximization rule:o Optimal q where MR = MCo In competitive markets, P = MROptimal q where P = MCFirm’s supply curve- One caveat: the shut-down conditionMarket supply curve- Add up the supplies of each of the firms at each price- *supply curves only apply to competitive markets- Market entry and exito Short run: number of firms in a market is fixedo Long run: firms can enter and exitShort-run supply curve- The supply curve: Qs = f(P) (or qS = f(P))- QS = f(P, input prices, technology, expectations, number of sellers)qS = f(P, input prices, technology, expectations)- The supply curve holds non-price determinants of supply constanto “ceteris paribus” – all else being equal- Inverse Supply Curve: P = f(Qs) or a “supply schedule” o Supply curve information in a table1/23/13- π = q(P-ATC(q))Determinants of supply- Priceso Law of supply: other things equal, quantity supplied of a good rises when the price of a good riseso “movement along the supply curve”- Input priceso As price to make something increases, it becomes less attractive to produceo Input prices ↑, supply ↓o Input prices ↓, supply ↑o “change in supply”- Technologyo Tech ↑ = more output with same inputs or same output with fewer inputso Tech ↓ = less output with same inputs or more input to make the same outputo Tech ↑  MC ↓  S ↑o Tech ↓  MC ↑  S ↓o “change in supply”- Expectationso Expectations about future prices, input prices, etc. These affect today’s supplyo “change in supply”- Number of sellerso # of sellers ↑  S ↑o # of sellers ↓  S ↓o “change in supply”- Move curve right for increase, left for decreaseThe demand curve- What does it mean to “demand” a good in economic terms?o Willing to payo Able to payo Ready to pay- The demand curve: QD = f(P) (or qD=f(P))- QD = f(P, income, prices of related goods, tastes, expectations, number of buyers)qD = f(P, income, prices of related goods, tastes, expectations)- The demand curve holds non-price determinants of demand constanto “ceteris paribus” – all else being equal- Inverse Demand Curve: P = f(QD) or a “demand schedule”o Demand curve information in a table1/24/13Determinants of demand- Priceo Law of demand: other things equal, quantity demanded of a good rises when the priceof a good falls (and vice versa) Exceptions exist but rareo “change in quantity demanded”o “movement along the demand curve”- Income (or wealth)o Normal goods I ↑  D ↑ I ↓  D ↓o Inferior goods (ex. riding the T) I ↑  D ↓  I ↓  D ↑o