Microeconomics Final UD, Professor Stewart

The firms total variable input spending (Price of variable input (PL) x quantity of variable input spending (L))

1st property: starts at the origin (if output is 0, the firm shuts down and doesn't buy any labor)

2nd property: positive slope (variable cost increases as output increases, because production is monotonic)

3rd property: mirrored S-shaped (slope is marginal cost)

The firms total fixed and variable input spending (fixed costs + variable costs)

1st property: positive y-intercept (if output is 0, the firm has to pay its total fixed costs)

2nd property: positive slope (variable cost increases as output increases, because production is monotonic) (marginal cost depends on the behavior of marginal product but in an inverse way)

3rd property: mirrored S-shape (because of slope)

Marginal cost (addition to total cost that comes from producing an additional unit of output)

AFC, AVC, ATC

(TFC/Q) the slope of a line from the origin to a point of the total fixed cost curve

There is a negative slope

It is a rectangular hyperbola, meaning the area under the curve will always be the same (TFC is constant)

(TVC/Q) the slope of a line from the origin to a point of the total fixed cost curve

U-shape because of the marginal average rule

(TC/Q) AVC+ATC

U-shape (ATC decreases to a minimum where ATC=MC and then increases)

*Marginal Average Rule
*The vertical distance between ATC and AVC is AFC
*Includes accounting profit as the implicit cost of capital
*Each ATC curve corresponds to a given size of factory

((PL x L)/Q) the relationship between the independent variable quantity and the dependent variable long-run average cost

Independent: quantity
Dependent: long run average cost

1st property: U shape
(•Price of variable input is constant
•Long run average cost decrease because of increasing returns to scale)

2nd property: an infinity of short run total cost curves
(•Each short run curve corresponds to a given size of factory)

Both are tangent at a minimum

the amount of total money a firm receives from the purchasers of its products without any deductions of cost (PRICE X QUANTITY)

Independent variable: quantity sold
Dependent variable: total revenue

1st property: starts at origin (if quantity sold is 0, total revenue is 0)
2nd property: positively sloped straight line (as quantity sold increases, total revenue increases)

Marginal Revenue (delta TR/delta Q) (equal to price in perfect competition)

Average Revenue (delta TR/delta Q) (equal to price in perfect competition)

Equal to the demand curve

Find the profit maximizing output level (total economic profit=TR-TC)

1) The vertical difference between the TR and TC is total economic profit is largest

2) Where the slopes of TC and TR are equal

3) MR and MC intersection point

4) The maximum point of the total economic profit curve

MR>MC, firm will increase output to increase total economic profit

MR=MC, firm is producing at profit-maximizing output

MR<MC, firm will decrease output to increase total economic profit

1st property: upside-down U-shape (slope is marginal economic profit (delta TEP/delta Q))
When MEP is positive, the firm has an incentive to increase output
When MEP is 0, the firm is producing at a maximum level for profit
When MEP is negative, the firm has an incentive to decrease output

If the firm shuts down, the maximum total economic losses are equal to TFC
1. If TR<TEC or P<AVC, then total economic losses are > TFC, the firm should SHUT DOWN
2. If TR=TVC or P=AVC, then total economic losses are = TFC, the firm should PRODUCE (indifferent)
3. If TR>TVC or P>AVC, then total economic losses are < TFC, the firm should PRODUCE

1. If TF<TC, the firm will incur economic losses
2. If TC=TC, the firm will incur no economic profit or losses
3. If TR>TC, the firm will incur economic profit

Where ATC is at a minimum and closest to the demand curve

the relationship between the independent variable price and the dependent variable quantity demanded, holding all other determinates of quantity supplied constant (the MC curve equal to and above average variable cost)

multiply the supply curve by the number of firms in the industry
(horizontal summation)

The MC, individual supply, and market supply curve will be horizontal

Positive slope (because of the assumption of the law of diminishing marginal returns)