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How does revenue change as output changes?

How does revenue change as output changes?

Description

School: University of Colorado
Department: Economics
Course: Principles of Economics: Microeconomics
Professor: De bartolome
Term: Spring 2016
Tags:
Cost: 50
Name: Econ 2010 Midterm 2 Study Guide
Description: Definitions from the textbook chapters, and key ideas and concepts from lecture.
Uploaded: 03/14/2016
10 Pages 34 Views 6 Unlocks
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Microeconomics Exam 2 Study Guide


How does revenue change as output changes?



Vocabulary

1.) Method of Marginal Decision­making­ Considering the effect of changing output one unit at a time

2.) Poverty Rate­ Percentage of the population whose family income falls below an absolute level called the poverty line

3.) Poverty Line­ Absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty

4.) Total Net Benefit­ Net benefit from buying plus net benefit from selling 5.) First Fundamental Welfare Theorem­ Market mechanism ensures maximum well being, partly through goods consumed, partly through profits received by shareholders 6.) World Price­ Price of a good that prevails in the world market for that good 7.) Intermediate Goods­ Inputs in a market, bought and used period by period, varied as firm makes more or less (variable input)


How does cost change as firm makes more cost?



Don't forget about the age old question of What is endochondral ossification?

8.) Capital­ Inputs which can’t be easily adjusted

9.) Total revenue­ Amount a firm receives for the sale of its output

10.) Total Cost­ Market value of the inputs a firm uses in production

11.) Profit­ Total revenue ­ total cost

12.) Explicit Costs­ Input costs that require an outlay of money by the firm 13.) Implicit Costs­ Input costs that do not

14.) Economic profit­ Total revenue ­ total cost including implicit and explicit 15.) Accounting profit­ Total revenue ­ explicit cost

16.) Production function­ Relationship between quantity of inputs and outputs 17.) Marginal Product­ Increase in output that arises from an additional unit of output 18.) Diminishing Marginal Product­ Marginal product of input declines as the quantity of the input decreases


In microeconomics, what is the method of marginal decision­ making?



19.) Fixed Costs­ Don’t vary with quantity of output (rent, etc)

20.) Average Total Cost­ Total cost divided by quantity of output Don't forget about the age old question of What is gonadal sex determined by?

21.) Average Fixed Cost­ Fixed cost divided by quantity of output

22.) Average Variable Cost­ Variable cost divided by quantity of output 23.) Marginal Cost­ Increase in total cost that arises from an extra unit of production 24.) Efficient Scale­ Quantity of output that minimizes total cost (bottom of U­curve)

Key Concepts

­ Individual buys all units for which MB > (or equal to) price

­ Demand curve equals Marginal Benefit curve

­ If everyone buys until MB = 5, they will all buy different quantities but their MB will be the same

­ Everyone values the product differently

­ Marginal Benefit of society of extra unit = MB of individual of getting the unit ­ Net benefit = area of triangle above price and under MB/demand curve ­ Price Ceilings

­ Usually create a shortage

­ Subtract intersection of ceiling with supply curve from intersection of demand curve to calculate shortage

­ Manager’s Objective­ to make as much profit as possible

­ By choosing how much to produce

­ Profit = Revenue ­ (variable) cost = “Producer surplus”

­ How does revenue change as output changes?

­ Example: Firm makes soup. Market price: $2. Don't forget about the age old question of What does long run aggregate supply represent?

­ With a competitive market, because the firm is small: It feels it can sell more output without the market price changing

­ As margin moves and firm makes extra unit, revenue increases by price ($2). So slope = 2. If you want to learn more check out What are the components of aggregate expenditures?
Don't forget about the age old question of What does unam sanctam mean?

­ Revenue = Price X Quantity sold

­ As they produce more, revenue increases by 2 for each extra can produced

­ How does cost change as firm makes more cost?

­ As firm produces more, it uses more inputs, cost up

­ Curve is upward sloping

­ Slope of cost curve = cost of extra unit = marginal cost

­ If Q is 0, first unit:

­ Firm has lots of unused machines

­ Workers very productive

­ 1st unit only hire a few workers

­ Extra cost associated with making the extra unit is LOW

­ Low marginal cost

­ Lots of spare capacity­ unused machines, workers with time Don't forget about the age old question of Why do fast glycolytic fibers fatigue quickly?

­ Doesn’t take a lot of workers to make a small number of cans

­ If Q is a lot:

­ Machines already being used

­ Workers less productive

­ To make extra unit: hire new workers

­ LAW OF INCREASING MARGINAL COST^

­ Smooth curve

­ If firm can make fractional units:

­ If they have to make soup by millions of cans, curve is not smooth ­ If they can make smaller units­ smoother

­ If all fractional units are possible ­ straight line

­ Profit = the distance between revenue and cost curves

­ To make profit as large as possible managers continue to increase profit until ­ Distance between curves is greatest

­ Slope of revenue curve = slope of cost curve, price = MC

­ When the price line is above the MC line, profits will go up. Sell until they intersect. ­ MC and Supply curves are the same for firms!

­ Firm makes all units for which MC < price or until MC = price

­ To find profit: area of triangle under price line and above supply curve ­ Society’s MC and Market Supply curves are the same

­ Society’s supply curve is formed by stacking individual firms’ supply curves ­ Produces all products for which the MC is less than the price

­ At each price (e.g. $1) produce all the soup cans that would cost less than $1 to make

­ MC different for each firm

­ Households benefit from firms’ profits

­ Firms owned by shareholders

­ Profits paid out to shareholders

­ Each household affected by market

­ As a consumer­ benefit from buying product

­ As shareholder­ benefit from profits paid by firm

­ Total well­being/net benefit/total surplus = sum of both

­ Net benefit from buying + net benefit from selling

­ Area of triangles added together

­ There are other social systems that determine what is produced and who gets it ­ Socialist system: Many goods provided “free” to everyone by taxes ­ Communist: everyone is told what goods they get/where they work ­ Measure which is best by the Net Benefit LOST because of market (as opposed to a perfect system)

­ Market mechanism ensures maximum well­being… better than an all­knowing planner ­ Partly through goods consumed

­ Partly through profits received by shareholders

­ FIRST FUNDAMENTAL WELFARE THEOREM

­ Everyone looks after themselves

­ But to make their net benefit gained as large as possible

­ Firms choose output to make their profits (net ben) as large as possible ­ Producer: if MB>MC, wants to produce more.

­ Individual: if MC>Price, buys more

­ Competitors ensure firms choose output that MC = price, so individuals compare MC with MB.

­ Price is the invisible hand

­ Efficiency vs Equity tradeoff

­ Market creates as much well­being as possible (efficiency)

­ Market distributes well­being unequally (equity)

­ When government redistributes wealth, slices of pie become more equal but the size of the pie itself (total net benefit) shrinks

­ World Trade

­ If the U.S. has a lower opportunity cost in a product, it will export it. ­ Total net benefit increases, slices change.

­ If import a good, consumers benefit more and producers benefit less ­ If export a good, consumers benefit less and producers benefit more

­ To calculate how much they will import/export:

­ The line of the new price will intersect with the demand and supply curves. To find the surplus or shortage subtract one intersection from the other.

­ If it is a surplus, that is how much they will export

­ If it is a shortage, that is how much they will import

­ Production relationship

­ Between inputs and outputs

­ Summary of what goes on inside firm

­ Inputs

­ Can’t be easily adjusted = CAPITAL

­ Machines, building

­ Stock: must be bought “up front” but then used over many periods ­ In near future these inputs are FIXED, do not change as firm

changes output (but can be changed in distant future

­ Can be easily adjusted = INTERMEDIATE GOODS/LABOR

­ Labor, electricity, steel

­ Varied as firm makes more or less­ variable input

­ Short run/ Long run

­ Fixed inputs fixed “in near future” but can be in “distant future”

­ Short run:

­ Time period in which firm can’t change number of

machines

­ If firm shuts down, still has fixed input

­ Short run production function

­ Relationship between input and output when capital is fixed

­ Marginal product of labor = slope of extra output produced by

moving margin and hiring an extra worker

­ E.g. at 10 workers, make 20 extra chairs. Ten more

workers, only make 10 extra chairs…

­ As move margin and hire extra worker

­ Each extra gives smaller increase in output

­ Law of Diminishing Marginal Product

­ Each extra worker has diminishing marginal product

­ Total output curve has decreasing steepness

­ MPL = Change in Q/ Change in Labor

­ Accountant/Manager/Economist

­ Accountant: Only counts explicit costs

­ Manager: Counts implicit and explicit costs

­ Economist: Counts opportunity costs

­ Manager and Economic profits will be the same number

­ Cost Function

­ Cost of capital doesn’t change with output

­ Cost of workers does

­ Variable cost curve and variable inputs curve will both have increasing steepness up (b/c Diminishing MPL)

­ Total cost = Fixed cost + Variable cost

­ Manager has 2 decisions

­ In short run­ whether to hire more workers to increase output (how much to produce)

­ Does extra money coming in exceed cost of extra workers of does price exceed MC?

­ If p > MC ­ produce more and profits will increase

­ If p = MC ­ profits are maximized

­ If p < MC ­ produce less and profits will increase

­ Doesn’t include cost of machines because we aren’t buying extras ­ Should we build a new plant?

­ Margin divides plants built from plants not built (between 1 and 2) ­ With a new plant we have to buy new machines (FIXED costs)

­ Does money coming in from existing plant exceed cost of machines and workers at existing plant?

­ Compare total revenue with total cost

­ Price X Quantity > Avg Total Cost X Quantity

­ Price > ATC

­ When deciding how much to produce:

­ Price vs MC

­ When deciding on new plant:

­ Price vs ATC

­ MC = Slope of curve at margin

­ MC = Change of TC/ Change in Q = Change in Variable cost/ Change in Q ­ ATC = TC/ Output quantity = slope of line connecting curve with (0,0) ­ AVC = Slope of line that connects point at Q w/ origin of CURVE (fixed cost, not (0,0) ­ U­Shaped Avg Cost Curve

­ Slope of Avg Fixed Cost curve gets flatter

­ Slope of Avg Variable cost increases steadily

­ ATC is average of both

­ As AFC is steeply decreasing, ATC decreases. When it flattens, ATC goes up with AVC which is getting positive

­ MC and ATC

­ MC curve goes through the lowest part of U­curve

­ When MC is less than ATC, ATC descends. When MC is more than ATC, ATC ascends.

Microeconomics Exam 2 Study Guide

Vocabulary

1.) Method of Marginal Decision­making­ Considering the effect of changing output one unit at a time

2.) Poverty Rate­ Percentage of the population whose family income falls below an absolute level called the poverty line

3.) Poverty Line­ Absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty

4.) Total Net Benefit­ Net benefit from buying plus net benefit from selling 5.) First Fundamental Welfare Theorem­ Market mechanism ensures maximum well being, partly through goods consumed, partly through profits received by shareholders 6.) World Price­ Price of a good that prevails in the world market for that good 7.) Intermediate Goods­ Inputs in a market, bought and used period by period, varied as firm makes more or less (variable input)

8.) Capital­ Inputs which can’t be easily adjusted

9.) Total revenue­ Amount a firm receives for the sale of its output

10.) Total Cost­ Market value of the inputs a firm uses in production

11.) Profit­ Total revenue ­ total cost

12.) Explicit Costs­ Input costs that require an outlay of money by the firm 13.) Implicit Costs­ Input costs that do not

14.) Economic profit­ Total revenue ­ total cost including implicit and explicit 15.) Accounting profit­ Total revenue ­ explicit cost

16.) Production function­ Relationship between quantity of inputs and outputs 17.) Marginal Product­ Increase in output that arises from an additional unit of output 18.) Diminishing Marginal Product­ Marginal product of input declines as the quantity of the input decreases

19.) Fixed Costs­ Don’t vary with quantity of output (rent, etc)

20.) Average Total Cost­ Total cost divided by quantity of output

21.) Average Fixed Cost­ Fixed cost divided by quantity of output

22.) Average Variable Cost­ Variable cost divided by quantity of output 23.) Marginal Cost­ Increase in total cost that arises from an extra unit of production 24.) Efficient Scale­ Quantity of output that minimizes total cost (bottom of U­curve)

Key Concepts

­ Individual buys all units for which MB > (or equal to) price

­ Demand curve equals Marginal Benefit curve

­ If everyone buys until MB = 5, they will all buy different quantities but their MB will be the same

­ Everyone values the product differently

­ Marginal Benefit of society of extra unit = MB of individual of getting the unit ­ Net benefit = area of triangle above price and under MB/demand curve ­ Price Ceilings

­ Usually create a shortage

­ Subtract intersection of ceiling with supply curve from intersection of demand curve to calculate shortage

­ Manager’s Objective­ to make as much profit as possible

­ By choosing how much to produce

­ Profit = Revenue ­ (variable) cost = “Producer surplus”

­ How does revenue change as output changes?

­ Example: Firm makes soup. Market price: $2.

­ With a competitive market, because the firm is small: It feels it can sell more output without the market price changing

­ As margin moves and firm makes extra unit, revenue increases by price ($2). So slope = 2.

­ Revenue = Price X Quantity sold

­ As they produce more, revenue increases by 2 for each extra can produced

­ How does cost change as firm makes more cost?

­ As firm produces more, it uses more inputs, cost up

­ Curve is upward sloping

­ Slope of cost curve = cost of extra unit = marginal cost

­ If Q is 0, first unit:

­ Firm has lots of unused machines

­ Workers very productive

­ 1st unit only hire a few workers

­ Extra cost associated with making the extra unit is LOW

­ Low marginal cost

­ Lots of spare capacity­ unused machines, workers with time

­ Doesn’t take a lot of workers to make a small number of cans

­ If Q is a lot:

­ Machines already being used

­ Workers less productive

­ To make extra unit: hire new workers

­ LAW OF INCREASING MARGINAL COST^

­ Smooth curve

­ If firm can make fractional units:

­ If they have to make soup by millions of cans, curve is not smooth ­ If they can make smaller units­ smoother

­ If all fractional units are possible ­ straight line

­ Profit = the distance between revenue and cost curves

­ To make profit as large as possible managers continue to increase profit until ­ Distance between curves is greatest

­ Slope of revenue curve = slope of cost curve, price = MC

­ When the price line is above the MC line, profits will go up. Sell until they intersect. ­ MC and Supply curves are the same for firms!

­ Firm makes all units for which MC < price or until MC = price

­ To find profit: area of triangle under price line and above supply curve ­ Society’s MC and Market Supply curves are the same

­ Society’s supply curve is formed by stacking individual firms’ supply curves ­ Produces all products for which the MC is less than the price

­ At each price (e.g. $1) produce all the soup cans that would cost less than $1 to make

­ MC different for each firm

­ Households benefit from firms’ profits

­ Firms owned by shareholders

­ Profits paid out to shareholders

­ Each household affected by market

­ As a consumer­ benefit from buying product

­ As shareholder­ benefit from profits paid by firm

­ Total well­being/net benefit/total surplus = sum of both

­ Net benefit from buying + net benefit from selling

­ Area of triangles added together

­ There are other social systems that determine what is produced and who gets it ­ Socialist system: Many goods provided “free” to everyone by taxes ­ Communist: everyone is told what goods they get/where they work ­ Measure which is best by the Net Benefit LOST because of market (as opposed to a perfect system)

­ Market mechanism ensures maximum well­being… better than an all­knowing planner ­ Partly through goods consumed

­ Partly through profits received by shareholders

­ FIRST FUNDAMENTAL WELFARE THEOREM

­ Everyone looks after themselves

­ But to make their net benefit gained as large as possible

­ Firms choose output to make their profits (net ben) as large as possible ­ Producer: if MB>MC, wants to produce more.

­ Individual: if MC>Price, buys more

­ Competitors ensure firms choose output that MC = price, so individuals compare MC with MB.

­ Price is the invisible hand

­ Efficiency vs Equity tradeoff

­ Market creates as much well­being as possible (efficiency)

­ Market distributes well­being unequally (equity)

­ When government redistributes wealth, slices of pie become more equal but the size of the pie itself (total net benefit) shrinks

­ World Trade

­ If the U.S. has a lower opportunity cost in a product, it will export it. ­ Total net benefit increases, slices change.

­ If import a good, consumers benefit more and producers benefit less ­ If export a good, consumers benefit less and producers benefit more

­ To calculate how much they will import/export:

­ The line of the new price will intersect with the demand and supply curves. To find the surplus or shortage subtract one intersection from the other.

­ If it is a surplus, that is how much they will export

­ If it is a shortage, that is how much they will import

­ Production relationship

­ Between inputs and outputs

­ Summary of what goes on inside firm

­ Inputs

­ Can’t be easily adjusted = CAPITAL

­ Machines, building

­ Stock: must be bought “up front” but then used over many periods ­ In near future these inputs are FIXED, do not change as firm

changes output (but can be changed in distant future

­ Can be easily adjusted = INTERMEDIATE GOODS/LABOR

­ Labor, electricity, steel

­ Varied as firm makes more or less­ variable input

­ Short run/ Long run

­ Fixed inputs fixed “in near future” but can be in “distant future”

­ Short run:

­ Time period in which firm can’t change number of

machines

­ If firm shuts down, still has fixed input

­ Short run production function

­ Relationship between input and output when capital is fixed

­ Marginal product of labor = slope of extra output produced by

moving margin and hiring an extra worker

­ E.g. at 10 workers, make 20 extra chairs. Ten more

workers, only make 10 extra chairs…

­ As move margin and hire extra worker

­ Each extra gives smaller increase in output

­ Law of Diminishing Marginal Product

­ Each extra worker has diminishing marginal product

­ Total output curve has decreasing steepness

­ MPL = Change in Q/ Change in Labor

­ Accountant/Manager/Economist

­ Accountant: Only counts explicit costs

­ Manager: Counts implicit and explicit costs

­ Economist: Counts opportunity costs

­ Manager and Economic profits will be the same number

­ Cost Function

­ Cost of capital doesn’t change with output

­ Cost of workers does

­ Variable cost curve and variable inputs curve will both have increasing steepness up (b/c Diminishing MPL)

­ Total cost = Fixed cost + Variable cost

­ Manager has 2 decisions

­ In short run­ whether to hire more workers to increase output (how much to produce)

­ Does extra money coming in exceed cost of extra workers of does price exceed MC?

­ If p > MC ­ produce more and profits will increase

­ If p = MC ­ profits are maximized

­ If p < MC ­ produce less and profits will increase

­ Doesn’t include cost of machines because we aren’t buying extras ­ Should we build a new plant?

­ Margin divides plants built from plants not built (between 1 and 2) ­ With a new plant we have to buy new machines (FIXED costs)

­ Does money coming in from existing plant exceed cost of machines and workers at existing plant?

­ Compare total revenue with total cost

­ Price X Quantity > Avg Total Cost X Quantity

­ Price > ATC

­ When deciding how much to produce:

­ Price vs MC

­ When deciding on new plant:

­ Price vs ATC

­ MC = Slope of curve at margin

­ MC = Change of TC/ Change in Q = Change in Variable cost/ Change in Q ­ ATC = TC/ Output quantity = slope of line connecting curve with (0,0) ­ AVC = Slope of line that connects point at Q w/ origin of CURVE (fixed cost, not (0,0) ­ U­Shaped Avg Cost Curve

­ Slope of Avg Fixed Cost curve gets flatter

­ Slope of Avg Variable cost increases steadily

­ ATC is average of both

­ As AFC is steeply decreasing, ATC decreases. When it flattens, ATC goes up with AVC which is getting positive

­ MC and ATC

­ MC curve goes through the lowest part of U­curve

­ When MC is less than ATC, ATC descends. When MC is more than ATC, ATC ascends.

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