ECON 221 Lecture 15Outline of Last Lecture I. Recap of competitive markets II. Productiona. The production functionb. Diminishing returns c. Production curvesIII. Cost Functionsa. Total costb. Marginal costc. Variable costOutline of Current Lecture I. Firms decision-makinga. Maximizing profitsb. Different types of competition II. Cost Curvesa. Total Cost Curveb. Average Total Cost CurveIII. Short Run vs. Long Run costsIV. Market Structure Current LectureThese 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.Lecture 17- Production - Big goal- Understand how prices and quantities are determined when markets aren’t perfectly competitive.- Understand how firms react to different types of competition (monopoly, oligopoly)- Build a more detailed model how individual firms… o Total product curve – relationship between Q and a factor of production – usually labor (holding other factors fixed)o Firms will maximize profits by choosing Q such that MR = MC o Defining characteristic – for the most part, diminishing return to labor (or other factor) Demonstrated by: Marginal product curve (of labor) MP = Change in output / change in labor o Total cost curve – relationship between output and cost TC = FC + VCo Defining characteristic- - for the most part, increasing marginal costs Demonstrated by: Marginal cost curve MC = change in cost / change in output- Average total cost curve - ATC = total cost/ total output- MC always intersects ATC at minimum of ATC  Average Total Cost (ATC) = TC/Q- So, TC = ATC*Q - Just like, Total Revenue (TR) = P*QShort run vs. Long run costs- Thus far, holding the fixed input fixed – short run- Long run all inputs are variable- Over time a firm can adjust its fixed cost (buy more capital) to accommodate the amount it expects to produce- What happens when you expand capitalo Higher fixed costs Spend to rent/upkeep new machines, factories, etc.o But potentially lower variable costs More capital yields more room for workers to be more productive, lowering costs - Varying fixed costso At low levels of output, increasing fixed inputs can lead to lower minimum ATC Increased possibilities of specialization  Called “Increasing Returns to Scale”o Eventually, increasing fixed inputs leads to higher minimum ATC “Decreasing Returns to Scale” Difficult to maintain, manageo Always choose the ATC curve that gives you the lowest cost for the amount you are willing to produceo Illustrated by “long-run average total cost curve” (LRATC)- General questions for the next few lectureso Firm behavior and consequences  How much to produce in order to maximize profits? What impact does firms’ profit-maximizing behavior have on the market? Depends on the market structure we are talking about: - Number of sellers?- Identical products?- Market structureo Perfect competition Many buyers Many sellers o Monopolistic competitiono Oligopolyo Monopoly - Profit maximization- choose Q where MR = MCo Profit = TR(K,L)) – TC(Q(K,L))o A firm wants to produce one more unit of a good if it will add profito That is, increase production if:  TR(Q+1)-TC(Q+1) > TR(Q)-TC(Q) [TR(Q)+MR(Q)]-TC(Q)+MC(Q)] > TR(Q)-TC(Q)MR(Q) > TC(Q) o So for PC firms, produce more if P > MC(Q); stop at the Q where P = MC(Q)- Perfect competitiono Many buyers and sellers o Selling identical productso Free entry & exit of firms o Seller and Buyers are “price-takers” Firm is a price-taker = firm can’t impact prices The firm always receives the market price when it sells a unit of a good MR always = price, regardless of quantity produce (for perfectly competitive