ECON 221 Lecture 14Outline of Last Lecture I. Public GoodsII. Marginal Social BenefitIII. Marginal CostIV. ContributionsOutline of Current Lecture I. Recap of competitive markets II. Productiona. The production functionb. Diminishing returns c. Production curvesIII. Cost Functionsa. Total costb. Marginal costc. Variable costCurrent Lecture- Competitive market o Huge number of sellerso Huge number of buyerso All sellers produce identical products- Most markets aren’t competitiveo Single seller – monopolyo SC E&G only electricity supplierThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Handful of sellers – oligarchyo Verizono AT&To More strategic interaction - Sellers producing products that are all slightly different (monopolistic competition)o Restaurants- Consequence- no longer “price takers” - How does moving away from competitive markets impact- prices, efficiency, CS, PS, etc. o How do firms reacto How do they know how much to produceo Level of competition - Many decisions are about HOW MUCH of something to doo How many pieces of pizza to eat?o How many years of education to attain?o How many workers to hire?o How many units to produce?- MARGINAL ANALYSIS- decide how much of something to do by comparingo Marginal benefit – benefit of one more unit of consumption/production o Marginal cost – cost of one more unito Optimal is always closest you can get to MB = MCo Benefit and cost depend on situation o For production  Benefit = Revenue Cost = CostPRODUCTION- Understanding how firms can maximize profitso Profits = Total Revenue – Total Costso Both revenue and cost depend on quantity produced Quantity produced depends on “inputs” Inputs:- Land - Labor- Capital - Inputs -> Production Function -> Output o Net Benefit = Total Benefit – Total Cost- Production function o Q = F(K,L) = √K * √Lo Suppose capital (K) is fixed at K = 1 and just think about changes in laboro Now we can draw “total product curve”o Total product (TP) curve represents relationship between total output and the quantity of one of the inputs (while holding the other fixed)o Diminishing returns: each additional unit of input adds less to TP than the last – each new person is a little less productive than the one before. o Marginal product of labor: How much more we can produce if we hire one more worker  MPL = Change in Q / Change in Lo Realistic Total Product Curve  Often realistic for TP to be upward sloping in the beginning- but still (for the most part) diminishing returns to laboro Production Function Q (K,L) describes our relationship between inputs and outputs Our goal to understand profits: Profit = TR (Q,(K,L)) – TC (Q,(K,L)) Revenue is just price times quantity- TR (Q,(K,L)) = P*Q (K,L)  Total cost consists of: fixed cost and variable cost- Fixed Cost – cost of fixed inputs (or inputs that firms cannot change in the short run)- Variable Cost- Cost of variable inputs (inputs that firms can change any time)o VC entirely depends on Qo So, TC(Q,(K,L)) = FC + VC(Q(K,L))o Total cost has to be a function of how much is being produced  Example: A pizza shop has to decide at the beginning of the year how many ovens to rent for $10,000, but can hire workers at any time for $20,000.- Here, ovens are a fixed cost and workers are a variable cost.- So if they rent one oven and hire two workers - TC = $10,000 + 2(20,000)o Here capital (ovens) was fixed and labor was variableo All inputs are variable in the long-runo In the short run, most things will be fixed o Total Cost Close relationship between total cost and total production  Ex. Wages = $20,000; Oven = $10,000 Rent one oven – workers can vary. - TC & MC Summaryo Total cost curve- plots relationship between output and total costo For most of the curve – because of diminishing returns to inputs, as we increase output, each additional unit costs more to produceo That is, for most of the curve, marginal costs are increasing- Average total costso ATC = TC/Q Whereas marginal cost measures how much one more unit costs to produce, average total cost measures how much each unit costs on