Wednesday, October 2, 2013

Unit III Marginal Utility vs Price

- Will always do it if marginal $> $Price, once < STOP!!!

Slices of Pizza Total Utility (in utils) Marginal Utility Benefits 0 1 2 3 4 5 6 7 8 0 8 14 19 23 25 26 26 24 0 8 6 5 4 2 1 0 -2

^Each slice of pizza costs $2

consumer: stop when marginal utility = marginal cost (5 slices of pizza)

Law of Marginal Utility: Result of Fixed Resources Inputs & Outputs

- to earn profit, firms must make products (outputs) - inputs are the resources used to make outputs - input resources are also called factors - total physical product (TP): Total output of quantity produced - Marginal Product (MP): The additional output generated by additional inputs
(workers)

- Average Product (AP): output/unit of input

Graphing Production

- 3 stages of returns 1. increasing marginal return - MP increases & TP increases at an increasing rate why? specialization 2. - MP decreases & TP increases b/c of fixed resources - workers getting in each others way 3. Decreasing marginal returns - Marginal return MP decrease & TP infinity - always hire to end of phase II b/c of continuous product period !1

Wednesday, October 2, 2013

Short run/ Long run

- short run: period in which at least 1 resource is fixed - long run: all resources are variables - short run is not specific amount of time - we all look at both short run & long run prediction costs - ATC = AFC + AVC
Different Economic Costs

- total costs total fixed costs (FC): total variable costs (VC): total costs (TC): FC + VC - Per Unit Cost Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Cost (ATC): Marginal Cost (MC):
TP VC 0 1 2 3 4 5 6 7 0 FC TC MC AVC 10 8 7 13/2 6 6 AFC 100 50 100/3 25 20 50/3 ATC 110 58 40 ! 31 " 26 22 #

100 100

10 100 110 10 16 100 116 21 100 121 26 100 126 30 100 130 36 100 136 6 5 5 4 6

40 100 140 10 40/7 100/7 20 incr

Why is Marginal cost U Shaped?

- marginal product increase, marginal cost decrease - marginal product increase, original cost increase - MP & MC are mirror images of each other - MC curve decrease, then increase b/c of diminishing
marginal return

- additional cost of first 3 units produced falls b/c

worker have increasing marginal returns

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Wednesday, October 2, 2013 - production continues, each worker adds less & less to production, so
marginal coat increases

- Demand increases: Price increases, Quantity increases long fun: demand shifting short run: supply shifts - profit made in short run
Fixed cost increase

- on graph: ATC shifts up, AFC shifts up - only shift total cost as result of shifting AFC - MC doesnt change only shift MC =
Variable cost increase marginal cost when theres change in supply

- On Graph: MC shifts up, ATC shifts - shift in AVC = shift in MC & ATC
Market Structure Perfect Competition monopolistic competition oligopoly monopoly # of Firms Many small firms few few one Control of Price consumer consumer producer producer Types of Goods same different but in same field same unique Barriers to Entry no barriers a few more barriers many barriers most barrier

Perfect Competition

- many small firms - identical products (perfect substitutes) - easy for firms to enter and exit the industry - seller has no need to advertise - firms are price takers/ the seller has no control of price ex) Avocado farmers, sunglass huts, and hammocks in Mexico - The Competitive Firm is a Price Taker, Price is set by the Industry
Demand

- Demand curve is perfectly Elastic - Mr = Demand = Average Revenue = Price !3

Wednesday, October 2, 2013 - In perfect competition D = MR - Profit Maximizing Rule MR = MC

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Shut Down Rule

- Firm should continue to produce as long as price is greater than AVC When below AVC, shut down below AVC: Pay to Shut Down - *shut down point: when AVC is at its minimum - When MR = D > ATC making a profit - ATC > MR = D > AVC
Profit Maximizing Rule (MR = MC)

- Rule applies to all market structures - rule applies only if price is

Marginal Cost & Supply

- price increase, quantity increase - MC = supply curve after it has increased MC above AVC is the supply curve - ex) variable cost increase (tax) MC shift left AVC shift up - ex) variable cost decreases (supply) !4

Wednesday, October 2, 2013 MC shift right - ex) No economic profit = natural profit price = MC = min. ATC Firm making a normal profit no reason to enter/ leave industry Price decreases, firm prices decreases

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