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Principles of Microeconomics:

Econ102

does not refer to a specific period of time, but rather are general or broad periods of time that coexist!!

Short-Run: The period of time during which at least one of the firm’s inputs is fixed.

Long-Run: A period of time long enough to allow a firm to vary all of its inputs, to adopt new technology, and to increase or decrease the size of its physical plant.

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Explicit Costs: Those paid to factors of production owned by people outside of the business (tangible, monetary costs)

Implicit Costs: Represent the opportunity costs of the owner(s), primarily intangible costs…..sacrifices….what is given up

Total Accounting Costs = Explicit costs only

Versus

Total Economic Costs = Explicit + Implicit costs

Where………

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Fixed costs: Costs that remain constant (don’t change) as output changes.

Variable costs: Costs that change as output changes.

Total cost: The cost of all the inputs a firm uses in production.

Total Cost = Fixed Cost + Variable CostTC = FC + VC

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Average Fixed Costs (AFC): Fixed costs divided by the quantity of output produced:

AFC = FC/Q

Average Variable Costs (AVC): Variable costs divided by the quantity of output produced:

AVC = VC/Q

Average Total Costs (ATC): Total costs divided by the quantity of output produced:

ATC = AFC+AVC or TC/Q

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……..is the additional output a firm produces as a result of hiring one more worker.

and determined by how much total output increases as each additional worker is hired.

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………because the Law of Diminishing Marginal Returns states that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable to decline.

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Marginal Cost: The change or additional cost to a firm’s total cost from producing one more unit of a good or service.

QTC MC

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……is the relationship between the inputs employed by the firm and the maximum output it can produce with those inputs

In-Class Assignment

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0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

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2.00

8 17 27 32 36 39

Output/Quantity of Flip-Flops Produced

Co

sts

per

Un

it

MC Curve

ATC Curve

AVC Curve

AFC Curve

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Because: When the marginal product of labor (MPL) is rising, the marginal cost (MC) of output will be falling. When the marginal product of labor is falling, the marginal cost of production will be rising.

Or

The marginal cost of production falls and then rises – a U-shape – because the marginal product of labor rises and then falls.

Or

When marginal cost is below average total cost (ATC), average total cost will fall. When marginal cost is above ATC, average total cost will rise. Marginal cost will equal ATC when average total cost is at its lowest point.

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The marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves are all U-shaped, and the marginal cost curve intersects the AVC and ATC curves at their minimum points. When marginal cost is less than either AVC or ATC, it causes them to decrease. When MC is above AVC or ATC, it causes them to increase. Therefore, when MC equals AVC or ATC, they must be at their minimum points.

As output increases, average fixed cost (AFC) gets smaller and smaller, because in calculating AFC we are dividing something that gets larger and larger – output – into something that remains constant – fixed cost. Otherwise known as spreading the overhead.

As output increases, the difference between ATC and AVC decreases because the difference between ATC and AVC is AFC, which gets smaller as output increases.

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Long-Run Average Total Cost:The cost to produce each unit of a product given that the company can choose the size of plant that is best for that quantity.

Long-Run Average Total Cost Curve (LRAC): A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

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Economies of Scale: Exist when a firm’s long-run average costs fall as it increases output. The law of diminishing marginal returns does not apply in the long-run.

Specialization

Large Machinery

Learning Curve / Learn by Doing Dynamic increasing returns to scale

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Diseconomies of Scale: Exist when a firm becomes large and its long-run average costs rise as it increases output.

Transportation costs Principal-agent problem Shirking Bureaucracy – hierarchy Different processes – different specialists

Constant Returns to Scale: Constant returns to scale exist when a firm’s long-run average costs remain unchanged as it increases output.

Minimum Efficient Scale: The level of output at which all economies of scale have been exhausted.

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MARKET STRUCTURE

CHARACTERISTICPERFECT COMPETITION

MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY

Number of firms

Type of product

Ease of entry

Examples of industries

Many

Identical

High

• Wheat• Apples

Many

Differentiated

High

• Selling DVDs• Restaurants

Few

Identical or differentiated

Low

• Manufacturing computers• Manufacturing automobiles

One

Unique

Entry blocked

• First-class mail delivery• Tap water

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