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Decisions producers make
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What to produce?
How much to produce?
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What producers consume
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Inputs (labor, capital, land, water)
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What consumers produce
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Trash, health, education
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Perfect competition
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-Many sellers
- Products are identical
- No barriers to enter
- Information is free and available
- Producers can't change their price
- Marginal revenue = Price
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Price
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determined by the market
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Production function
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Output= f(inputs)
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Producers objective
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maximize profit
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Marginal product
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the extra output or change in total product caused by the addition of one more unit of variable input
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Average product
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How much output you get given the level of input
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Labor
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number of workers (variable)
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Capital (K)
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all physical objects necessary for production (fixed)
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Non-durable capital
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can only use once (fertilizer)
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Durable capital
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reusable (building and machinery)
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Land
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necessary input for agricultural production
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Management
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farmers
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Law of Diminishing Marginal Returns
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the principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease
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Profit
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total revenue minus total cost
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Marginal cost
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the cost of producing one more unit of a good
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Stage 1
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Production is increasing at an increasing rate, keep hiring (MP>AP and AP is increasing)
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Stage 2
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Production is increasing at a decreasing rate, stop hiring (MP<AP and AP is decreasing)
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Stage 3
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When the extra labor cannot increase production anymore, Stop hiring (MP<0 or negative)
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Short run
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Total cost=fixed cost + variable cost
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Fixed cost
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a cost that does not change as output is increased or decreased (TC - VC)
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Variable cost
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a cost that varies with changes in the level of output (AVC x Q)
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Average cost
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Fixed cost+ Variable cost/ output
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Long run
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All costs are variable
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Breakeven price
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The price at which the firm will make zero profits. (Price = Average cost)
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Shutdown price
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the price at which a firm is indifferent between producing and shutting down (Total revenue = Variable cost)
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Average variable cost
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variable cost divided by the quantity of output
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Average Fixed Cost (AFC)
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Average cost - Average variable cost
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Total cost
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the sum of fixed and variable costs
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Marginal Revenue (MR)
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What you gain from producing and selling one more unit
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Price = marginal cost
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Profit maximization condition under perfect competition
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Sunk Cost
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costs that have already been incurred and cannot be recovered
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Supply Curve
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marginal cost curve
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Marginal Value Product (MVP)
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The value of additional output from an additional unit of input (MPL x Price)
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Isoquant
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Different levels of labor and capital that will provide the same level of output (Similar to indifference curves)
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Keep hiring
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MVP > Wages
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Stop hiring (make decision)
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MVP = Wages
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