Beruflich Dokumente
Kultur Dokumente
Chapter 9
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Laugher Curve
A woman hears from her doctor that she has only half a year to live. The doctor advises her to marry an economist and to move to South Dakota.
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Laugher Curve
Will this cure my illness? she asked. No, but the half year will seem pretty long.
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Introduction
In the supply process, people first offer their factors of production to the market. s Then the factors are transformed by firms into goods that consumers want.
s
q Production
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The firm is an economic institution that transforms factors of production into consumer goods it:
q Organizes
factors of production. q Produces goods and services. q Sells produced goods and services.
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firms subcontract out all work. q More and more of the organizational structure of business is being separated from the business.
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costs costs of undertaking trades through the market, and q The rent or command over resources that organizers can appropriate to themselves by organizing the market in a certain way.
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Firms are the production organizations that translate factors of production into consumer goods.
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revenue. q Economist focus on both explicit and implicit costs and revenue.
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For an economist, total cost is explicit payments to factors of production plus the opportunity cost of the factors provided by the owners of the firm.
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Economists define total revenue as the amount a firm receives for selling its good or service plus any increase in the value of the assets owned by firms.
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For economists:
Economic profit = (explicit and implicit revenue) (explicit and implicit cost)
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The production process can be divided into the long run and the short run.
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A long-run decision is a decision in which the firm can choose among all possible production techniques.
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A short-run decision is one in which the firm is constrained in regard to what production decision it can make.
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Production Production
s
A production table shows the output resulting from various combinations of factors of production or inputs.
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Production Production
s
Marginal product is the additional output that will be forthcoming from an additional worker, other inputs remaining constant.
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Production Production
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Average product is calculated by dividing total output by the quantity of the output.
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Production Production
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Production function a curve that describes the relationship between the inputs (factors of production) and outputs.
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Production Production
s
The production function tells the maximum amount of output that can be derived from a given number of inputs.
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A Production Table
Number of workers 0 1 2 3 4 5 6 7 8 9 10
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Total output 0 4 10 17 23 28 31 32 32 30 25
Marginal product 4 6 7 6 5 3 1 0 2 5
Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5
A Production Function
32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 7 6 Output per worker TP 5 4 3 2 1 1 2 9 10 3 4 5 6 7 8 9 10 Number of workers MP (b) Marginal and average product 0 1 2 AP
Output
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Both marginal and average productivities initially increase, but eventually they both decrease.
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The most relevant part of the production function is that part exhibiting diminishing marginal productivity.
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Law of diminishing marginal productivity as more and more of a variable input is added to an existing fixed input, after some point the additional output one gets from the additional input will fall.
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Total output 0 4 10 17 23 28 31 32 32 30 25
Marginal product 4 6 7 6 5 3 1 0 2 5
Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 Increasing marginal returns Diminishing marginal returns Diminishing absolute returns
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Fixed costs are those that are spent and cannot be changed in the period of time under consideration.
q In
the long run there are no fixed costs since all costs are variable. q In the short run, a number of costs will be fixed.
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The sum of the variable and fixed costs are total costs.
TC = FC + VC
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Average Costs
s
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Average Costs
s
Average total cost (often called average cost) equals total cost divided by the quantity produced.
ATC = TC/Q
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Average Costs
s
AFC = FC/Q
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Average Costs
s
AVC = VC/Q
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Average Costs
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Average total cost can also be thought of as the sum of average fixed cost and average variable cost.
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Marginal Cost
Marginal cost is the increase (decrease) in total cost of increasing (or decreasing) the level of output by one unit. s In deciding how many units to produce, the most important variable is marginal cost.
s
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The total variable cost curve has the same shape as the total cost curveincreasing output increases variable cost.
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Total cost
TC = (VC + FC) L O M 2 4 6 8 10
Quantity of earrings
FC 20 30
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When output is increased in the short-run, it can only be done by increasing the variable input.
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The law of diminishing marginal productivity sets in as more and more of a variable input is added to a fixed input. s Marginal and average productivities fall and marginal costs rise.
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And when average productivity of the variable input falls, average variable cost rise.
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The average total cost curve is the vertical summation of the average fixed cost curve and the average variable cost curve.
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If the firm increased output enormously, the average variable cost curve and the average total cost curve would almost meet. s The firms eye is focused on average total costit wants to keep it low.
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Cost
The shapes of the cost curves are mirrorimage reflections of the shapes of the corresponding productivity curves.
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When one is increasing, the other is decreasing. s When one is at a maximum, the other is at a minimum.
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$18 16 14 12 10 8 6 4 2 0
MC AVC
9 8 7 6 5 4 3 2 1
A AP of worker s MP of workers
4 8 12162024Output
0 4 8 12162024Output
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Marginal cost curves always intersect average cost curves at the minimum of the average cost curve.
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The position of the marginal cost relative to average total cost tells us whether average total cost is rising or falling.
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Marginal and average total cost reflect a general relationship that also holds for marginal cost and average variable cost.
If MC > AVC, then AVC is rising. If MC = AVC, then AVC is at its low point. If MC < AVC, then AVC is falling.
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As long as average variable cost does not rise by more than average fixed cost falls, average total cost will fall when marginal cost is above average variable cost,
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