Microeconomics Exam 2 Study Guide Two sides to running a Business Revenue Cost how much you spend how much you make Revenue cost Profit 3 Measures of revenue and 3 measures of cost the entire amount 1 Total 2 Average 3 Marginal total number of units additional or from buying selling one more unit Revenue Total Revenue TR the amount of money a firm makes from sales Price x Quantity Average Revenue AR the average amount of money the firm makes on sales per unit sold Marginal Revenue MR the additional money the firm will make from selling one more unit Total Revenue Quantity Change in Total Revenue Change in Quantity Example of MR Selling hotdogs for 5 each First hotdog sold for 5 Two hotdogs sold for 10 MR 10 5 2 5 Two Types of Cost Fixed Costs FC costs that do not change as production quantity changes Ex Cost of building machines rent etc Variable Cost VC costs that do change as production quantity changes Ex Labor materials etc Cost per unit x Quantity Total Cost the amount of money the firm spends to sell its goods Fixed Cost Variable Cost Fixed Cost Cost per unit x Quantity 3 Measures of Cost Average Cost the average amount of money the firm spends per unit sold Average Fixed Cost AFC Average Variable Cost AVC Average Total Cost ATC Total fixed cost Quantity Total Variable Cost Quantity Average Fixed Cost Average Variable Cost ATC Total Cost TC Quantity Marginal Cost the additional money the firm must spend to produce one more unit Change in Total Cost Microeconomics Exam 2 Study Guide Change in Quantity Traditionally Profit Total Revenue Total Cost 2 Costs to Keep Track Of 1 Explicit Costs Implicit Costs 2 Explicit Costs implicit costs total opportunity cost costs that require the firm to spend money costs that do not require the firm to spend money 2 Measures of Profit Accounting Profit Total Revenue Explicit Cost Economic Profit Total Revenue Explicit Cost Implicit Cost If Economic Profit is positive then that activity is the best use of your time If Economic Profit is negative your next best alternative is a better use of your time Total Opportunity Cost Firms maximizes profit at the quantity where MARGINAL REVENUE MARGINAL COST In other words point where additional value of selling a good equals the additional value of producing good The Production Function the relationship between the number of inputs and the number of outputs produced Labor L Capital K Inputs K L Assembly Outputs everything Marginal Product MP the increase in output that arises from an additional unit of input Marginal product of labor MPL Change in Total Product Change in Quantity of labor Marginal product of capital MPK Change in Total Product Change In Quantity of Capital Diminishing Marginal Product the property whereby the marginal product of an input declines as the quantity of the input increases Microeconomics Exam 2 Study Guide Graph of Production Function and Total cost curve Typical Cost Curves for Firms Rising Marginal Cost AVC AFC U Shaped ATC increases because of declines as output increases diminishing marginal product because it is a combination of AVC and AFC output that minimizes average total cost the quantity of it is U shaped Efficient Scale Relationship between MC and ATC Whenever Marginal Cost is less than ATC average total cost is falling Whenever Marginal cost is greater than ATC average total cost is rising Marginal cost curve crosses average total cost curve at its minimum Time Short run something is held fixed o We experience diminishing returns o At first might experience increase marginal product o Eventually will experience diminishing marginal product Long run nothing held fixed everything can change o We adjust it to avoid diminishing returns Microeconomics Exam 2 Study Guide Average Total Cost in the Short and Long Runs Long run average total cost curve is much flatter U shaped than short run average total cost All short run average total cost curves are on or above long run average total cost workers organization Economies and Diseconomies of Scale Economies of scale when long run average total cost declines as output increase Often arise because higher production levels allow specialization among Diseconomies of scale when long run average total cost rises as output rises Can arise because of coordination problem that are inherit in any large Constant returns to scale when long run average total cost does not vary with the level of output Term Definition Mathematical Description Explicit costs Implicit costs Fixed costs Variable costs Total cost Average fixed cost Costs that require an outlay of money by the firm Costs that do not require an outlay of money by the firm Costs that do not vary with the quantity of output produced Costs that vary with the quantity of output produced FC VC The market value of all the inputs that a firm uses in production Fixed cost divided by the quantity of output TC FC VC AFC FC Q Microeconomics Exam 2 Study Guide Average variable cost Variable cost divided by the quantity of output AVC VC Q Average total cost Total cost divided by the quantity of output ATC TC Q Marginal cost The increase in total cost that arises from an extra unit of production MC TC Q
View Full Document
Unlocking...