Chapter 13 ECU Microeconomics

Economists normally assume that the goal of the firm is to
1. Sell as much of their product as possible
2. Set the price of their product as high as possible
3. Maximize profit

The amount of money that a firm receives from the sale of its output is called total gross profit

The amount of money that a firm pays to buy input is called total cost

Profit is defined as net revenue minus depreciation

Net profit can be added to profit to obtain total revenue

Economists normal assumes that the goal of the firm is:
1. Make profit as large as possible even if it means reducing output
2. Make profit as large as possible even if it means incurring a higher total cost
3. Make revenue as large as possible

Total Revenue equals total output multiplied by price per unit of output.

Those things that must be forgone to acquire a good are called substitutes

Explicit costs require an outlay of money by the firm.

An example of an explicit cost of production would be the cost of forgone labor earnings for an entrepreneur

An example of an implicit cost of production would be the income an entrepreneur could have occurred working for someone else

Accountants are primarily interested in the flow of money into and out of firms

John owns a shoe shine business, his accountant most likely includes wages John could earn washing windows

The cost of accounting services would be regarded as a implicit cost

Economic profit is equal to total revenue-the explicit cost of producing goods and services

Accounting profit is equal to marginal revenue- marginal cost

Economic profit is equal to:
1. Explicit costs+ implicit costs
2. Total- revenue- opportunity costs
3. Accounting profit + implicit costs

Accounting profit is equal to:
1. Total revenue-implicit costs
2. Total revenue-opportunity costs
3. Economic profit + implicit costs

Economic profit will never exceed accenting profit

To an economist, it is conceivable that the objective that motivated an individual entrepreneur to start a business arises from an innate love for that type of business that he or she starts

When a firm is making a profit- maximizing production decision, the cost of something is what you give up to get it is likely to be most important to the firms decision

A production function is a relationship between inputs and quantity of output

The marginal production or labor can be defined as change in profit/change in labor

The marginal production equal to the incremental cost associated with a one unit increase in labor

One would expect to observe diminishing marginal product of labor when crowded office space reduces the productivity of new workers

When adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding labor we have the property of diminishing labor

For a firm that uses labor to produce output, the production function depicts the relationship between the quantity of labor and the quantity of output.

The firm can vary the number of workers it employs but not the size of its factory, this assumption is often realistic for a firm in the short run.

Assume a certain firm regards the number of workers it employs as variable, and that it regards the size of its factory as fixed, this assumption is often realistic in the short run, but not the long run.

The marginal product of an input in the production process is the increase in total revenue obtained from an additional unit of that input.

A total cost curve shows the relationship between the quantity of an input used and the total cost of production.

Average fixed costs do not vary with the amount of output a firm produces

An example of a fixed cost would be
1. raw materials supplied at a government-regulated price
2. rent paid on a factory
3. machine maintenance

Fixed costs can be defined as costs that vary inversely with production.

Suppose Jan is starting up a small lemonade stand. Variable costs for Jans stand would include the cost of building the stand.

If a firm produces nothing, total costs would be 0.

One assumption that distinguishes short run cost analysis from long run cost analysis for a profit maximizing firm is that in the short run, output is not variable.

The cost of producing the typical unit of output is the firms average total cost

Average total cost=output/total cost

The amount by which total cost rises when the firm produces one additional unit of output is called effective cost.

The cost of producing an additional unit of output is the firms marginal cost.

Variable cost/ quantity produced= average Total cost

Average Total cost tells us the vertical cost of the first unit of output, if total cost is divided evenly over all the units produced

Marginal cost tells us the value of all resources used In a production process.

Diminishing marginal product suggests that additional units of output be come less lost as more output is produced

The average fixed cost curve always declines with increased levels of output

Average total cost is very high when a small amount of output is produced because average variable cost is high

The efficient scale of the firm is the quantity of output that maximizes marginal product

When marginal cost is less than average total cost, marginal cost exceeds average total cost

When marginal cost exceeds average Total cost average fixed cost must be rising

Average Total cost is increasing whenever total cost is increasing

Marginal cost is equal to average total cost when average variable cost is falling

The marginal cost curve crosses the average total cost curve at the efficient scale

marginal cost is below average total cost it is constant

At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost rises.

Total cost can be divided into 2 types, fixed and variable costs.

Some costs do not vary with the quantity of output produced. Those costs are called marginal costs

When marginal cost is less than average total cost, average total cost is rising

The firms efficient scale is the quantity of output that minimizes average total cost

Harrys hotdogs is a vendor, He is trying to categorize his costs by making them fixed or variable. cost of mustard is fixed costs.

when a firm is able to put idle equipment to use by hiring another worker, variable costs will rise.

When a firm is operating at an efficient scale, average variable cost is minimized.

Marginal cost of 5th unit of output= total cost of 5 units- total cost of 4 units

When marginal cost is rising/ average variable cost must be rising

marginal cost arises as the quantity of output increases

When a factory is operating in the short-run, it can't alter variable costs.

In the long run, input that were fixed in the short run remain fixed

The long run total cost curve is always flatter than the short run average total cost curve, but not necessary horizontal

The length of the short run is different for types of firms

Economies of scale occur when long run average total costs rise as output increases

Diseconomies of scale occur when average fixed costs are falling.

Constant returns to scale occur when long run total costs are constant as output increases.

Specialization among workers occurs when quality management allows workers to switch from one taste to another.

If a firm wants to capitalize on economies of scale, it may be Able to do so by assigning limited tasks to their employees so they can master those tastes.

In references to setting the production level, a firms cost curves by themselves don't tell decisions the firm will make.

Economies to scale arise when an economy is self sufficient in production.

It takes a firm 6 months to go from the short run to the long run.

In the long run, a firm that produces an sells computers gets to choose how many workers to hire, the size of its factories and which short run average total cost curve to use

When, for a firm, long run average total cost decreased s the quantity of output increases, we have a situation of economies of scale.

Constant returns to scale refers to the situation in which, for a firm, all of the firms short run average total cost curves are horizontal.

Long run average total cost curves are often u-shaped for the same reasons that average total cost curves are often u-shaped.