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Marginal Analysis
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Comparing the benefits and costs of a decision incermentally, one unit at a time
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Industry
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A group of firms that all produce and sell the same product
Different industries exhibit different characteristics of competiton, information, prices and more
Different industries exhibit different characteristics of competiton, information, prices and more
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Indusrty with Perfect Competition
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A large number of buyers and sellers
A homogeneous product
Freedom of entery and exit
perfect information
A homogeneous product
Freedom of entery and exit
perfect information
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Homogenous Product
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A product that is the same no matter which producer produces it
The producer of a good cannot be identified by the consumer
The producer of a good cannot be identified by the consumer
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perfect information
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a situation where all buyers and sellers in a market have complete access to technological information and all input and output prices
No inside information connot exixt
Produceror firm ALL KNOW the prices, quantities, qualities and technology avaible
No inside information connot exixt
Produceror firm ALL KNOW the prices, quantities, qualities and technology avaible
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Price Taker
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A competitive firm that cannot influence the price of a good
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Price Marker
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A noncompetitive firm that can influebce the price of their own good
Can set their own prices
Can set their own prices
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Total Revenue Product (TRP)
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the dollar value of the output produced from each level of variable input
TRP=TPP*Py
Units in Dollar
TRP=TPP*Py
Units in Dollar
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Total Factor Cost (TFactorC)
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The total cost of a factor or input
TFC=Px*X
TFC=Px*X
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Marginal Revenue Product (MRP)
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The additional (marginal) value of output obtained from each additional unit of the varible input
MRP=MPP*Py
MRP=MPP*Py
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Marginal Factor Cost (MFC)
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The cost of additional (marginal) unit of input
The amount added to total cost of using on more unit of input
MFC= Change in TC/ Change In X
The amount added to total cost of using on more unit of input
MFC= Change in TC/ Change In X
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Average Revenue Product (ARP)To
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The average value of output per unit of input at each input use level
ARP=APP*Py
ARP=APP*Py
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Ecomic Way of thinking
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Cost outweighs benefits
Making better decisions at margin
Making better decisions at margin
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Total Revenue Product (TRP)
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The dollar value of the output produced from each level of variable input
TRP=TPP*Py
TRP=TPP*Py
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Margianl Factors Cost (MFC)
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The cost of an additional (marginal) unit of input
The amount added to total cost of using one more unit of input
MFC= Change in Total Factor Cost/Change in X
The amount added to total cost of using one more unit of input
MFC= Change in Total Factor Cost/Change in X
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Graph of MRP and MFC
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Continue buying inputs until MRP=MFC
When slopes of TRP and TFC are equal
When slopes of TRP and TFC are equal
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The Profit maximizing rule
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Benefits outweigh the cost
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The Profit maximizinf level of output
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The sum of all payments that firm must make to purchase the factors of production
The sum of total fixed costs and total varible Costs
TC=TFC+TVC
The sum of total fixed costs and total varible Costs
TC=TFC+TVC
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Total Costs (TC)
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The amount of money received when the producer sells the product
TR=TPP (Y) *Py
TR=TPP (Y) *Py
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Total Revenue (TR)
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Profit = TR-TC
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Profits
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The addition to total revenue from selling one more unti of output
MR=Change in TR/Change in Y
Marginal Revenue is constant for every level of output
MR=Change in TR/Change in Y
Marginal Revenue is constant for every level of output
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Graph TR and TC
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The addition to total cost of producing one more unit of output
MC= change in TC/Change in Y
MC= change in TC/Change in Y
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Marginal Revenue (MR)
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The average dollar amount recevied per unit of outout sold
AR=TR/Y
AR=TR/Y
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Marginal Cost (MC)
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Marginal Revenue = Marginal Cost
Marginal cost must "cut" Marginal Revenue from below
Marginal cost must "cut" Marginal Revenue from below
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Average Revenue (AR)
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If Py > ATC profits are Positive
If Py < ATC profits are Negative
If Py < ATC profits are Negative
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Graph Profit Maximizing Level of output
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Occurs when there are no economic profits or losses
Occurs when TR=TC
Py= ATC= MC=AR=MR
Occurs when TR=TC
Py= ATC= MC=AR=MR
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Profit Maximizing Conditions
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If ATC > Py > AVC the firm is covering all variable costs and some fixed costs
Staying in business is better than closing down and owing all fixed costs
The firm remains in busibess with negative profits to minimize losses
This is the optimal profit maximizing (cost minimzing) solution
Staying in business is better than closing down and owing all fixed costs
The firm remains in busibess with negative profits to minimize losses
This is the optimal profit maximizing (cost minimzing) solution
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Graph MRP and MFC
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the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
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Graph TR and TC
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At any price level above the shutdown point (Py>AVC) the firm will remain in business
Firm can meet all of its variable cost and some fixed costs
At any price below the shutdown point (Py < AVC) the firm will shut down
Firm cannot even meet variable cost
Firm can meet all of its variable cost and some fixed costs
At any price below the shutdown point (Py < AVC) the firm will shut down
Firm cannot even meet variable cost
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Profit Maximizing Conditions
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Replacing laborers with highly productive and expensive machinery
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Break-even Point
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Y=f(L,K | A,M)
Vary two inputs (L&K)
Vary two inputs (L&K)
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Break-even graph
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a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
Combinations of two variable inputs will produce level of output
Combinations of two variable inputs will produce level of output
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Stay in Business with Negative Profit
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Where labor cheap, use more labor, where labor is expensive, use more capital
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Shutdown point (short run)
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The rate at which one input can be decreased as the use of another input increases to take its place
The slope of the isoquant
MRTS = Change in X2/ Change in X1
The slope of the isoquant
MRTS = Change in X2/ Change in X1
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shutdown point Graph
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all the combinations of two inputs, such as capital and labor, that have the same total cost
Slope= (-P1 / P2)
Slope= (-P1 / P2)
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The shutdown point occurs where:
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is where the Isocost line is tangent to the Isoquant
Slope of the Isoquant (MRTS) is equal to the slope of the Isocost line
Slope of the Isoquant (MRTS) is equal to the slope of the Isocost line
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Trend Substitution of Capital for Labor
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Optimal Input Selection
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Isoquant
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Isoquant Graph
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Relative Prices
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Marginal Rates of Technical Substitution (MRTS)
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Marginal Rate of Technical Substitution (MRTS)
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Isocost Line
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Isocost Line
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Equilibrium
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Equilibrium
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