I. What Are Costs?

A. Total Revenue, Total Cost, and also Profit

1. The goal of a firm is to maximize profit.

You are watching: Whenever marginal cost is greater than average total cost,

2.Definition of total revenue:

3. Definition of full cost:

4. Definition of profit:

B. Costs as Opportunity Costs

1. Principle #2: The price of something is what you provide as much as gain it.

2. The prices of producing an item should incorporate every one of the possibility prices of inputs supplied in production.

3. Total opportunity expenses incorporate both implicit and also explicit expenses.

a. Definition of explicit costs:.

b. Definition of implicit costs:

c. The complete cost of a organization is the amount of explicit costs and implicit prices.

C. The Cost of Capital as an Opportunity Cost

1. The possibility expense of financial funding is a crucial expense to include in any analysis of firm performance.

2. Example: Caroline uses $300,000 of her savings to begin her firm. It was in a savings account paying 5% interemainder.

3. Since Caroline can have earned $15,000 per year on this savings, we must encompass this chance cost. (Keep in mind that an accountant would certainly not count this $15,000 as part of the firm's prices.)

4. If Caroline had actually rather obtained $200,000 from a bank and supplied $100,000 from her savings, the opportunity expense would not adjust if the interemainder price continued to be the same (according to the economist). But the accountant would certainly currently count the $10,000 in interest phelp for the bank loan.

D. Economic Profit versus Accounting Profit

Definition offinancial profit:

Definition ofbookkeeping profit:.

II. Production and Costs

1. Definition of manufacturing function:

Number of Workers

Output

Marginal Product of Labor

Cost of Factory

Cost of Workers

Total Cost of Inputs

0

0

---

$30

$0

$30

1

50

50

30

10

40

2

90

40

30

20

50

3

120

30

30

30

60

4

140

20

30

40

70

5

150

10

30

50

80

6

155

5

30

60

90

Definition ofmarginal product:

Definition ofdiminishing marginal product:

4. We have the right to attract a graph of the firm's production attribute by plotting the level of labor (x-axis) against the level of output (y-axis).

NOTE!!!! I will certainly do a straightforward example in this study guide. Our in class assignments were more facility and also had expertise. These only have crowding.

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a. The slope of the manufacturing feature procedures marginal product.

b. Diminishing marginal product have the right to be checked out from the fact that the slope falls as the amount of labor supplied boosts.

B. From the Production Function to the Total-Cost Curve

1. We deserve to attract a graph of the firm's complete price curve by plotting the level of output (x-axis) versus the total cost of producing that output (y-axis).

a. The full price curve gets steeper and also steeper as output rises.

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III.The Various Measures of Cost

1. Definition of addressed costs:

2. Definition of variable costs:

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3. Total expense is equal to addressed price plus variable expense.

Output

Total Cost

Fixed Cost

Variable Cost

Median Fixed Cost

Median Variable Cost

Typical Total Cost

Marginal Cost

0

$3.00

$3.00

$0

---

---

---

---

1

3.30

3.00

0.30

$3.00

$0.30

$3.30

$0.30

2

3.80

3.00

0.80

1.50

0.40

1.90

0.50

3

4.50

3.00

1.50

1.00

0.50

1.50

0.70

4

5.40

3.00

2.40

0.75

0.60

1.35

0.90

5

6.50

3.00

3.50

0.60

0.70

1.30

1.10

6

7.80

3.00

4.80

0.50

0.80

1.30

1.30

7

9.30

3.00

6.30

0.43

0.90

1.33

1.50

8

11.00

3.00

8.00

0.38

1.00

1.38

1.70

9

12.90

3.00

9.90

0.33

1.10

1.43

1.90

10

15.00

3.00

12.00

0.30

1.20

1.50

2.10

C. Typical and also Marginal Cost

1. Definition of average complete cost:

2. Definition of average resolved cost:

3. Definition of average variable cost:

4. Definition of marginal cost:


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5. Mean full cost tells us the expense of a typical unit of output and marginal expense tells us the expense of a second unit of output.

D. Cost Curves and also Their Shapes

1. Rising Marginal Cost

a. This occurs bereason of diminishing marginal product.

b. At a low level of output, there are few workers and also the majority of idle devices. But as output boosts, the coffee shop gets crowded and the price of creating another unit of output becomes high.

2. U-Shaped Median Total Cost

a. Average complete expense is the amount of average resolved expense and also average variable price.


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b. AFC declines as output increases andAVC commonly boosts as output broadens. AFC is high once output levels are low. As output increases, AFC declines pulling ATC dvery own. As resolved costs get spcheck out over a big variety of devices, the impact ofAFC onATC drops andATC starts to climb bereason of diminishing marginal product.

3.The Relationship between Marginal Cost and Average Total Cost

a. Whenever before marginal cost is less than average complete price, average full expense is falling. Whenever before marginal expense is greater than average total price, average total expense is climbing.

b. The marginal-expense curve crosses the average-total-expense curve at minimum average total price.

4.Common Cost Curves

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a. Marginal cost inevitably rises through output.

b. The average-total-expense curve is U-shaped.

c. Marginal expense crosses average full price at the minimum of average total expense.

I. What Is a Competitive Market?

A. The Meaning of Competition

1. Definition of competitive market:

Total revenue from the sale of output is equal to price times quantity.


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II. Profit Maximization and also the Competitive Firm's Supply Curve

The Marginal-Cost Curve and also the Firm's Supply Decision

1. Cost curves have actually distinct features that are essential for our analysis.

a. The marginal-expense curve is upward sloping.

b. The average-total-cost curve is U-shaped.

c. The marginal-price curve crosses the average-total-cost curve at the minimum of average total expense.

2. Marginal and average revenue deserve to be displayed by a horizontal line at the market price.

3. To uncover the profit-maximizing level of output, we can follow the same rules that we discussed over.

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a. If marginal revenue is greater than the marginal price, the firm must increase its output.

b. If marginal expense is better than marginal revenue, the firm should decrease its output.

c. At the profit-maximizing level of output, marginal revenue and marginal cost are precisely equal.

4. These rules use not only to competitive firms, yet to firms via sector power as well.

C. The Firm's Short-Run Decision to Shut Down

1. In certain scenarios, a firm will certainly decide to shut dvery own and also develop zero output.

2. Tright here is a difference in between a short-term shutdown of a firm and also an exit from the market.

a. A shutdown refers to a short-run decision not to develop anything throughout a certain period of time because of current industry problems.

b. Exit refers to a long-run decision to leave the industry.

c. One important difference is that, when a firm shuts dvery own temporarily, it still should pay addressed costs. If a firm exits the market in the long run, it has actually no expenses.

3. If a firm shuts dvery own, it will earn no revenue and also will have just solved costs (no variable costs).

4. Therefore, a firm will certainly shut down if the revenue that it would certainly get from creating is much less than its variable costs of production:

Shut down ifTR VC.

5. BecauseTR =P xQ andVC =AVC xQ, we deserve to rewrite this problem as:

Shut down ifP AVC.

6. We now deserve to tell exactly what the firm will execute to maximize profit (or minimize loss).

a. If the price is less than average variable cost, the firm will certainly create no output.

b. If the price is over average variable cost, the firm will create the level of output where marginal revenue (price) is equal to marginal price.

If:

The Firm Will:

P ≥AVC

Produce output level whereMR =MC

P AVC

Shut down and also create zero output

7. Thus, the competitive firm's short-run supply curve is the portion of its marginal revenue curve that lies over average variable expense.

8. Spilt Milk and Other Sunk Costs

a. Definition of sunk cost: a price that has actually been committed and cannot be recovered.

b. Once a cost is sunk, it is no longer an chance cost.

c. Due to the fact that nopoint can be done about sunk expenses, you must neglect them once making decisions.

D. The Firm's Long-Run Decision to Exit or Get in a Market

1. If a firm exits the sector, it will earn no revenue, however it will have no costs as well.

2. As such, a firm will exit if the revenue that it would earn from developing is less than its full costs:

Exit ifTR TC.

3. BecauseTR =P xQ andTC =ATC xQ, we have the right to recreate this problem as:

Exit ifP ATC.

4. A firm will enter an sector once tbelow is profit potential, so this have to expect that a firm will enter if earnings will exceed costs:

Go into ifP >ATC.

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5. Because, in the lengthy run, a firm will certainly reprimary in a sector just ifP ≥ATC, the firm's long-run supply curve will be its marginal cost curve over ATC.

If:

The Firm Will:

P >ATC

Go into because economic earnings are earned

P =ATC

Not enter or departure bereason financial profits are zero

P ATC

Exit bereason economic losses are incurred

E. Measuring Profit in Our Graph for the Competitive Firm

1. Recontact that Profit = TR −TC.

2. BecauseTR =P xQ andTC =ATC xQ, we have the right to recompose this equation:

Profit = (P – ATC) xQ.

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3. Using this equation, we have the right to measure the amount of profit (or loss) at the firm's profit-maximizing level of output (or loss-minimizing level of output).

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III. The Supply Curve in a Competitive Market

A. The Short Run: Market Supply via a Fixed Number of Firms

1. Example: a industry through 1,000 identical firms.

2. Each firm's short-run supply curve is its marginal price curve over average variable price.

3. To obtain the sector supply curve, we add the quantity provided by each firm in the sector at eextremely offered price.

B. The Long Run: Market Supply via Entry and Exit

1. If firms in an market are earning profit, this will entice brand-new firms.

a. The supply of the product will boost (the supply curve will shift to the right).

b. The price of the product will autumn and profit will decline.

2. If firms in an market are incurring losses, firms will departure.

a. The supply of the product will certainly decrease (the supply curve will shift to the left).

b. The price of the product will certainly increase and also losses will certainly decrease.

3. At the end of this procedure of enattempt or leave, firms that reprimary in the industry have to be earning zero economic profit.

4. Because Profit = TR –TC, profit will certainly only be zero when:

TR =TC.

5. BecauseTR =P xQ andTC =ATC xQ, we have the right to recreate this as:

P =ATC.

6. Because of this, the process of enattempt or exit ends only once price and also average full price end up being equal.

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7. This implies that the long-run equilibrium of a competitive market need to have actually firms operating at their effective scale.