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
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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
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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.
