3 2 15 of Cans 0 600 1000 1300 1500 1600 All equations are derived from the cost benefit principle only continue activity if the marginal benefit is greater than or equal to marginal cost MB MC Revenue Price time Quantity P Q Hours per day 0 1 2 3 4 5 Supply Curves slope up because 1 marginal cost increases and 2 higher prices bring new suppliers Profit Maximization Revenue Cost Cost includes both explicit cost what you spend and implicit cost what you sacrifice Perfectly Competitive Market markets in which individual firms have no influence over the market prices of the products they sell Revenue from MP MQ x Price 600 02 12 400 02 8 300 02 6 200 02 4 100 02 2 Marginal Quantity 600 400 300 200 100 A lot of sellers and buyers Easy entry and exit Price Taker No market power can only decide how much to produce at that price Demand Curve is horizontal P MR Production Turns inputs into outputs Q F C L Short Run when one factor of production is fixed Long Run all inputs are variable Law of Deminishing Returns when some factors of production are fixed increased production of the food eventually requires even larger increases in the variable factor Fixed Cost FC sum of all payments for fixed inputs Ex If you have netflix no matter how much or how little you watch each month it is 8 Variable Cost VC sum of all payments for variable inputs Ex Electricity bill changes from month to month depending on how much you use Total Cost TC sum of all payments for inputs TC FC VC marginal Cost MC change in total cost divided by the change in input Change in TC Change in Q Find the Output the Maximizes profit Profit Total Revenue Total Cost Total revenue comes from selling the bottles total cost labor fixed cost capital variable cost the firm must know about both revenues and cost in order to maximize profit Workers Day Bottles day 0 1 2 3 4 0 80 200 260 300 Fixed Cost 40 40 40 40 40 Variable Cost Total Cost 0 12 24 36 48 40 52 64 76 88 MC 12 80 15 12 120 10 12 60 20 12 40 30 40 40 40 60 72 84 100 112 124 12 30 40 12 20 60 12 12 1 3 4 15 330 5 350 6 7 362 Average Total Cost Average Variable Cost TC Q VC Q Revenue P x Q Profit Revenue cost or Profit P ATC x Q Loss ATC P x Q Surplus A 1 2 x B x H triangle Cost Benefit analysis MC MB Total Cost FC VC MC Change in TC Change in Q AVC VC Q ATC TC Q In a perfectly competitive market sellers are price takers Meaning they do not have market power and cannot decide how much to sell their product for they can only decide how much to sell at that price On a graph where the price line meets the MC curve they are maximizing profit P MR MC Demand curve is always horizontal because the firms do not have control over price If more sellers enter the market then the supply curve will shift to the right and the cost will decrease When P ATC profit When P ATC loss When P ATC the factory should not shutdown if P is still than AVC When P AVC they should shut down
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