Microeconomics Notes Brian Park 1 9 13 Supply of good markets comes from firms Supply of factor markets comes from households Profit o Total Revenue Total Cost accounting profit o Total Cost explicit cost implicit cost economic profit Opportunity cost o Deciding factor of how much to supply for producers o Ex Current Job 50 000 Projected total revenue of new business 100 000 Explicit costs 40 000 Accounting profit 100 000 40 000 60 000 Total opportunity cost 40 000 explicit 50 000 loss from current job 90 000 Economic cost total revenue total opportunity cost 10 000 Revenue o 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 price o 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 Qold 1 10 13 Total Cost TC TC q o Total cost is a function of quantity Costs can be either fixed or variable o Total Fixed Cost TFC constant Constant regardless of output change o Total Variable Cost TVC TVC q Changes as output changes o Total Cost TFC TVC o 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 decreasing o ATC MC ATC increasing Productio Total Total Total Average Average Average Marginal n Quantity Cost Fixed Variable Total Fixed Variable Cost TC Cost Cost Cost Cost Cost MC TFC TVC ATC AFC AVC 1 14 13 15 15 15 15 15 15 15 15 25 33 42 55 70 88 N A N A N A 25 15 16 50 7 50 14 55 4 14 5 3 3 75 10 9 9 10 11 73 88 6 2 50 73 6 0 1 2 3 4 5 6 Production function o Economic terms production scale capital Quantity of Labor Number of Workers Units Produced Marginal Product Average Product of Quantity of Labor MPL Labor APL 0 1 2 3 4 N A 10 8 6 4 N A 10 8 9 13 15 18 N A 10 4 2 1 0 10 18 27 40 55 0 10 18 24 28 5 30 2 4 o 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 L o 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 product o Is it always cheaper to be bigger Economies of scale when average cost decreases as quantity increases i e 1 16 13 Diseconomies of scale when average cost increases as quantity increases i e bigger is cheaper smaller is cheaper o Increasing returns to scale twice as much of ALL inputs produces more than twice as o Decreasing returns to scale twice as much of ALL inputs produces less than twice as o Constant returns to scale twice as much of ALL inputs produces exactly twice as much output much output much output Profit maximization Profit is maximized at the quantity where marginal revenue equals marginal cost There could be multiple points where MR MC o Always maximize not minimize profit Competitive markets Many buyers and sellers nearly identical products Free entry and exit Set a MR MC such that in competitive markets MR P o 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 is used as profit 1 17 13 Firm s profit maximization rule o Optimal q where MR MC o In competitive markets P MR Optimal q where P MC Firm s supply curve One caveat the shut down condition Market supply curve Add up the supplies of each of the firms at each price supply curves only apply to competitive markets Market entry and exit o Short run number of firms in a market is fixed o Long run firms can enter and exit Short 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 constant o ceteris paribus all else being equal Inverse Supply Curve P f Qs or a supply schedule o Supply curve information in a table q P ATC q 1 23 13 o Law of supply other things equal quantity supplied of a good rises when the price of o As price to make something increases it becomes less attractive to produce Determinants of supply Prices a good rises o movement along the supply curve Input prices o Input prices supply o Input prices supply o change in supply Technology o Tech more output with same inputs or same output with fewer inputs o Tech less output with same inputs or more input to make the same output o Expectations about future prices input prices etc These affect today s supply o Tech MC S o Tech MC S o change in supply Expectations o change in supply Number of sellers o of sellers S o of sellers S o change in supply Move curve right for increase left for decrease The demand curve What does it mean to demand a good in economic terms o Willing to pay o Able to pay o 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 constant o ceteris paribus all else being equal Inverse Demand Curve P f QD or a demand schedule o Demand curve information in a table o Law of demand other things equal quantity demanded of a good rises when the price 1 24 13 Determinants of demand Price of a good falls and vice versa Exceptions exist but rare o change in quantity demanded o movement along the demand curve Income or wealth o Normal goods o Inferior goods ex riding the T I D I D I D I D o change in demand Prices of related goods o Substitutes instead of PA DB vice versa PA DB vice versa o Complements together PA DB vice versa PA DB vice versa o change in demand Tastes o Taste D o Taste D o change in demand Expectations o Expectations on future prices future income …