ECON 251 1st Edition Lecture 14Outline of Last Lecture I. TermsII. Consumer EquilibriumIII. MRS and Extreme IC’sIV. Changes in Consumer EquilibriumV. Changes in PriceVI. Two Effects of a Price ChangeVII. Three PossibilitiesOutline of Current Lecture I. TermsII. Profit, Production, and CostsIII. ProductionIV. Relationship Between MPl and APlV. CostsCurrent LectureI. TermsProfit: revenue – costAccounting Profit: revenue – explicit costsEconomic Profit: revenue – explicit costs – implicit costs = revenue – opportunity costsShort Run: any period of time when at least ONE input is fixedLong Run: any period of time when ALL of the inputs are variableMarginal Product (of labor): additional output produced by one more unit of laborLaw of Diminishing Returns: MPl (l = L) always eventually declines of L increaseAverage Product (of Labor): output produced = Q / LII. Profit, Production, and CostsAssuming: goal of firms is to maximize profitIF economic profit > 0 => revenue > opportunity cost- (you are making more money with the current allocation of your resources (capital, land, labor) than you could be making anywhere else)IF economic profit < 0 => revenue < opportunity costThese 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.- NOTE: you can still be making moneyIF economic profit = 0 => revenue = opportunity cost - “normal profit” – you’re not doing better than anywhere else, but you’re not doing worseEXAMPLEI own a restaurantRevenue $300,000/yearCosts:Rent $40,000Utilities $5,000Wages $60,000Food $30,000Supplies $8,000Total: $143,000Revenue – costs = 157,000 ( = accounting profit)My best alternative: working as a personal chef making $250,000/yearEconomic profit = 300,000 – 143,000 – 250,000 = -93,000 (because it’s negative, you should choose your best alternative, BUT it’s ok if you decide running your own restaurant is worth it toyou i.e. worth $93,000)III. ProductionFor our example: assuming all inputs are fixed except labor Labor (L) Q of output (totalproduct, TP)MPl = ΔQ/ΔL APl = Q/L0 0 - -1 25 25 252 58 33 293 75 17 254 85 10 21 ¼5 90 5 186 *88 -2 14 2/3 *Dealing with the short run*You can go down because you have things you have to spend as you increase laborGraph of Total ProductL = X, Q = YIV. Relationship Between MPl and APlIF MPl > APl => increase APlIF MPl < APl => decrease APlIF MPl = APl => no change in AP => max of APlV. CostsFixed Cost = costs that DO NOT very with outputVariable Costs = costs that DO very with outputFC + VC = total cost (TC)L Q FC = $10 VC TC AFC =FC/QAVC =VC/QATC =TC/Q0 0 10 0 10 - - -1 25 10 5 15 0.4 0.2 0.62 58 10 10 20 0.17 0.17 0.343 75 10 15 25 0.13 0.2 0.334 85 10 20 30 0.12 0.23 0.355 90 10 25 35 0.11 0.28 0.39WAGE = $5AVC = VC / QAFC = FC /