Describe what the marginal cost and the average cost each represent Describe the relationship between the margin and the average Use an example Explain with an example the following relationship When the margin is above the average it pulls the average up When the margin is below the average it pulls the average down Comment on the following assertion when the margin is going up it pulls the average up When the margin is going down it pulls the average down Describe and explain the relationship between the marginal cost curve and the average cost curve Given a MC curve draw an appropriate AC curve Note with no numbers on the axes there s one crucial element in consistency Given an AC curve draw an appropriate MC curve Note same note as before pg 99 Marginal cost the cost it takes to make each specific unit the unique cost of each successive unit average cost measured by dividing total cost of production by total number produced thus spreading the cost out evenly among the units produced as if they all cost the same to produce The margin moves faster than the average The margin always pulls the average in its direction When the margin is above the average it pulls the average up When it is below it pulls the average down Ex GPA if your average is a 3 5 and you get a 3 7 for the semester it will pull the average up If you get a 3 3 for the semester it will pull the average down This is true like the explanation given above The margin always pulls the average in its direction Ex GPA This is not necessarily true The average only goes up if the margin is above average and the average only goes down if the margin is below the average Thus one s margin could drop continuously but as long as each value remains above the average the average will continue to be pulled up MC controls what AC looks like AC and MC start at the same unit AC is higher AC would follow MC down but because AC does not fall as fast MC the MC would be below the AC Even when MC turns up the AC would continue to go down as long as MC is below it The point at which MC cuts above AC it starts to pull the AC up the MC cuts the AC at minimum average cost point Identify the point along the AC curve at which the MC intersects the AC Explain the special significance of that point in terms of the cost structure of the firm Define total revenue total cost Describe in terms of total revenue and total cost the condition of a firm when it is making a profit suffering a loss breaking even Given a generic firm market picture showing a current market condition and given either the AC or the MC of the generic firm s cost structure complete the firm s cost structure and a Identify the demand line of the firm b Identify the supply line of the firm c Identify the quantity the firm will produce d Identify the average cost of production for the quantity the firm will produce e Identify the total revenue of the firm f Identify the total costs of the firm g Identify whether the firm is making a profit suffering a loss or breaking even h Identify the size of any profit or loss of the firm pg 101 and slide show This is the point at which the average cost of producing a good is at its minimum at this point MC is above the AC line which brings AC up This point demonstrates the efficiency of perfect competition because products are being made at the cheapest price possible Total revenue TR the amount of money a firm takes in from the sale of its product TR p x Q or price times quantity Total cost TC the amount of money the firm spends in the process of producing TC AC x Q or average cost times quantity Profit pie TR TC when this is greater than zero there is a profit when TR is higher than TC when TC is more than TR the firm is suffering a loss and if TR TC the firm is breaking even a Generic Firm Demand line market price horizontal line Market slopes down intersection of demand and supply line is point at which demand in Generic firm picture is b GF The marginal cost line is the supply line it goes down and then slopes up M slopes up c GF produce where MC line meets the demand line d GF when dropping vertical quantity line from part c place where it hits the AC line is the AC e GF Quantity firm produces at c from the demand line down f GF AC line down g GF Profit Space between Revenue and TC lines suffering a loss AC line is above profit line breaking even AC line and demand line are the same h Profit TR TC See picture below Given a generic firm market picture showing the cost structure of the firm and either the supply or demand line in the market complete the market picture such that the firm is a enjoying a profit b suffering a loss c breaking even slide show a b c Explain the following statement Profit is gravy All firms want a profit but no firms need a profit Describe how profit functions as a signal under the nice assumptions that give perfect competition As long as a firm s normal return is covering its costs it is bringing in enough revenue to make staying in business worthwhile it is covering opportunity cost anything above the normal return is gravy nice but not necessary As competitors learn about a market that offers a profit they join the market When the market is doing poorly firms will either leave or not enter the market As more competitors enter the market supply shifts and price falls As the market price falls the profits of the firms in the market get squeezed The competition will push the price down until only costs are covered and there is no profit Given a generic firm market picture in which the initial market conditions and the generic firm s cost structure are given and in which the firm is initially making a profit show how the market will respond Identify the place where the market response will end Note This point must be determined in reference to the generic firms cost structure Do the same in the case of an initial loss condition pg 101 slideshow Explain the following statement Profit is a powerful yet ephemeral signal Market attracts new firms but it extinguishes itself in the process because more competitors means that there will be lower prices thus reducing profit under perfect conditions they seek profit but end up breaking even when firms are suffering losses so they exit the market till losses are gone Using appropriate graphs explain how given our nice assumptions the …