ECON 2020 (Dr. Macy Finck) October 3-7
ECON 2020 (Dr. Macy Finck) October 3-7 Econ 2020
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This 3 page Class Notes was uploaded by Gabrielle Ingros on Friday October 7, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Fall 2016. Since its upload, it has received 6 views. For similar materials see Principles of Economics: Microeconomics in Economics at Auburn University.
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Date Created: 10/07/16
ECON 2020 Lecture 4: Special Indifference Curves & Costs and Profits • Special Indifference Curves: o Perfect Substitutes – goods for which the marginal rate of substitution is constant, no matter how much of each is consumed (the consumer will almost always buy the one that is cheaper) o Perfect Complements – goods that a consumer will consume in the same ratio regardless of their relative price (the consumer’s utility does not change unless he has both the complement goods) • Perfect Substitutes Graph: o Example: a consumer has $55 to spend on bundles containing Exxon (x) and Chevron (c) Gasoline; Px = $2.75 and Pc = $2.50 § Purple Line = Budget Line § For perfect substitutes, the optimal bundle will lie on one of the end point on the graph (0 units of x and 22 units of c). • Optimal Bundle = Income / Lowest P • Perfect Complements Graph: o Example: a consumer has $24 to spend on bundles containing ham (h) and bread (b); Ph = $6 and Pb = $2 ECON 2020 § Purple Line = Budget Line § The consumer will buy (3 units of H and 3 units of B) • Optimal Bundle = Income / (Px + Py) • Profit (Π): o Π = Total Revenue – Total Cost o Total Revenue (TR) = P * Q • Total Cost can be defined multiple ways: o Accounting Π = TR – Explicit Cost o Economic Π = TR – Economic Cost • Economic cost includes the implicit cost, which for a producer is the forgone income from employing resources in their next-best use o Example: § TR = $15,000 § Explicit Cost = $11,000 § Implicit Cost = $4,000 § Find Accounting and Economic Profits o Solution: § Accounting (pi) = 15,000 – 11,000 = $4,000 § Economic (pi) = 15,000 – (11,000 + 4,000) = $0 • Zero profit tells us that there is not a better opportunity for the producer in other markets, and that there is not a better opportunity for other producers to come in and make this product. • Normal Profit (Zero Profit): o (1) The firm is doing just as well as it could in another industry o (2) Accounting Profit = Implicit Cost o (3) Economic Profit = $0 Lecture 5: Costs and Profits Continued • Time in Production: o Short Run – an amount of time insufficient to allow plant capacity to vary; also, firms may shutdown production, but they cannot exit the market o Plant Capacity – the size of the building and amount of capital equipment o Long Run – all costs are variable; entry and exit are possible • Short Run Costs: o Fixed Costs: § Cannot be varied in the short run § Do not change as the output changes § Still exist when output falls to zero § Usually associated with capital ECON 2020 o Variable Costs – costs that change as the output changes; go to zero during shutdown § Total Cost = Total Fixed Cost + Total Variable Cost § Average Fixed Cost = Total Fixed Cost / Quantity § Average Variable Cost = Total Variable Cost / Quantity § Average Total Cost = Total Cost / Quantity = (Avg)FC + (Avg)VC § Marginal Cost = ΔTC / ΔQ o Marginal Cost – the additional cost associated with a 1 unit increase in Q • Short Run Costs Table: Q TFC TVC TC MC AFC AVC ATC 0 240 0 240 ---- ---- ---- ---- 1 240 50 290 50 240 50 290 2 240 90 330 40 120 45 165 3 240 120 360 30 80 40 120 4 240 160 400 40 60 40 100 5 240 240 480 80 48 48 96 • What is Π (Cost) for a firm with these costs selling 5 units for a price of $100? o Π = TR – TC = (5 * 100) – 480 = $20 • Short Run Costs Graph: • Very Important: ATC and AVC must cross MC at their minimum
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