Economists = maximize profit At first, when only few workers are hired,

each labor unit has easy access to capital

Profit
The amount the firm receives for the sale of
its output is called revenue. The amount that
the firm pays to buy inputs is called cost.
Profit is revenue minus cost.
goods.
As the number of workers increases,
additional workers have to share the capital
and work in more crowded conditions.

Profit = Total Revenue - Total Cost

Total revenue =QUANTITY x PRICE

Opportunity cost.

When economists speak of a firm’s cost or

production, they include all the opportunity
costs of making its output of goods and
services.

Explicit = input costs that require an outlay

of money by the firm. Implicit = input costs
that do not require an outlay of money by
the firm. Cost = inc in inc way

Total cost curve shows the relationship

Production and cost
Firms incur costs when they buy inputs to
produce goods and services that they plan to
sell.
between the quantity of output produced and
total cost of production. Notice: the total-cost
curve gets steeper as the quantity of output
increases. It is because of DMP.

Assumption: capital is fixed and production Fixed costs: costs that do not vary with the
can be only increased by increasing labor. quantity of output produced. Variable costs:
costs that do vary with the quantity of output
produced.

Total cost = FC + VC

RISING MC

Q Increase in dec way

Diminishing marginal product states that

the marginal product of an input declines as
the quantity of the input increases.
ATC is u-shaped. First it decreases because
as quantity increases, the AFC decreases
more than AVC increases, then eventually
increases this is because as quantity
increases, AVC increases more than AFC
decreases
Average fixed cost always declines as output
rises because the fixed cost is getting spread
over a large number of units.
Average variable cost typically rises as
output increases because of DMP.
Relationship bet. MC and ATC
ATC > MC = ATC decreases
ATC < MC = ATC Increases
Costs in the SR and LR
Short-run = firms can produce additional
output is to hire more workers (at fixed
capital).
Long-run = firms can expand its capital
base (capital is no longer fixed but rather
variable).
Long Run = capital is no longer fixed
Long-run ATC cost falls as the quantity of
output increases
Price stays constant because capital is no
longer fixed.
Economies of scale often arise because
higher production levels allow
specialization among workers, which
permits each to become better at his
work
Diseconomies of scale can arise because
of coordination problems that are
inherent in any large organization. The
more the management team gets
stretched, the less effective they become
in putting costs down.
PROFIT IN COMPETITIVE
MARKETS
A competitive market (or perfectly
competitive market)
a. There are many buyers and many
sellers in the market.
b. Goods offered by the sellers are
homogenous The actions of any buyer or
seller in the market have a negligible
impact on the market price -> price-
takers
c. Firms can freely enter and exit the
market.
Price is fixed.
Profit maximization
1) largest profit,
2) Comparing MR and MC
Shutdown = short-run decision not to
produce anything during a specific period
of time because of current conditions.

P < AVC

Exit = long-run decision to leave the

market.

P < ATC

Sunk cost = cost that has already been

committed and cannot be recovered
(fixed cost).