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E 201

by: Solon Dooley

E 201 ECON

Solon Dooley
GPA 3.84

John Stone

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John Stone
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This 0 page Class Notes was uploaded by Solon Dooley on Sunday November 1, 2015. The Class Notes belongs to ECON at Indiana University taught by John Stone in Fall. Since its upload, it has received 11 views. For similar materials see /class/233471/econ-indiana-university in Economcs at Indiana University.


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Date Created: 11/01/15
Chapter 13 Total revenue the amount a firm receives for the sale of its output Total cost the market value of the inputs a firm uses in production Profit total revenue minus total cost Explicit costs input costs that require an outlay ofmoney by the firm Implicit costs input costs that do not require an outlay ofmoney by the firm 0 Economists are interested in studying how firms make production and price decisions Economists include explicit costs and implicit costs when measuring a firm s costs Accountants have the job of keeping track of the money that ows into and out of firms They measure costs that require an out ow ofmoney from the firm but they do not include the opportunity cost ofproduction that do not inclove an out ow ofmoney Accountants measure the explicit costs but usually ignore the implicit costs 0 O O 0 Firms try to maximize profit An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business Economic profit total revenue minus total cost including both explicit and implicit costs Accounting profit total revenue minus total explicit cost Production function the relationship between quantity of inputs used to make a good and the quantity of output of that good Marginal product the increase in output that arises from an additional unit of input Diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the input increases Fixed costs costs that do not vary with the quantity of outputs produced Variable costs costs that vary with the quantity of outputs produced Average total cost total cost divided by the quantity of output Average fixed cost fixed cost divided by the quantity of output Average variable cost variable cost divided by the quantity of output Marginal cost the increase in total cost from an extra unit ofproduction Average total cost total cost quantity Marginal cost change in cost change in quantity Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced Marginal tells us the increase in total cost that arises from producing an additional unit of output Efficient scale the quantity of output that minimizes average total cost Whenever marginal cost is less than average total cost average total cost is falling Whenever marginal cost is greater than average total cost average total cost is rising Marginal cost eventually rises with the quantity ofoutput The averagetotalcost curve is Ushaped The marginalcost curve crosses the averagetotalcost curve at the minim um of average total cost Many costs are fixed in short run and variable in long run As a result when the firm changes its level ofproduction average total cost may rise more in the short run than in the long run Economies of scale longrun average total cost falls as the quantity of output increases Diseconomies of scale longrun average total cost rises as the quantity of output increases Constant returns to scale longrun average total cost stays the same as the quantity of output changes Chapter 14 Competitive market a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker 0 Buyers and sellers must accept the price the market determines 0 Firms can feely enter or exit the market Average revenue total revenue divided by the quantity sold 0 For all rms average revenue equals the price ofthegood Marginal revenue the change in total revenue from an additional unit sold 0 When Q is raised by 1 unit total revenue rises by P dollars 0 For com petitive rms marginal revenue and average revenue equals the price of the good If the marginal reven ue is greater than marginal cost the production should increase If the marginal revenue is less than the marginal cost the production should decrease Profit Maximization for a Competitive Firm 0 If MR is greater than MC the firm should increase its output 0 IfMR is less than MC the firm should decrease its output 0 At the profitmaximizing quantity MR MC THE FIRM MAXIMIZES PROFIT BY PRODUCING THE QUANTITY AT WHICH MR MC The marginalcost curve is also the competitive rm 5 supply curve because it determines the quantity ofthe good the rm is willing to supply at any price Shutdown a shortrun decision not to produce anything during a specific period of time because of current market conditions Exit a longrun decision to leave the market The rm shuts down ifthe revenue that it wouldgetfrom producing is less than its variable costs of production TR lt VC 9 TRQ lt VCQ 9 P lt AVC The competitive rm 5 shortrun supply curve is the portion of its marginalcost curve that lies above average variable cost The size of the xed cost does not matter for this supply decision Sunk cost a cost that has already been committed and cannot be recovered The rm exits the market ifthe revenue it would getfrom producing is less than its total costs TR lt TC 9 TRQ lt TCQ 9 P lt ATC The competitive rm s longrun supply curve is the portion of its marginal cost curve that lies above average total cost Profit Total Revenue TR Total Cost TC Profit TRQ TCQ x Q Profit P ATC x Q At the end ofthis process ofentry and eXit rms that remain in the market must be making zero economic pro t In the longrun equilibrium ofa competitive market withfree entry and eXit rms m ust be operating at their efficient scale In the zeroprofit equilibrium economic profit is zero but accounting profit is positive Marginal firm the firm that would exit the market if the price were any lower The long run supply curve is typically more elastic than the shortrun supply curve because the rms can enter and eXit more easily in the longrun than in the shortrun


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