Micro Exam 1

Economics

Allocation of scarce resources

Micro

Examining things on a small scale

Opportunity Cost

Explicit cost + implicit cost

Explicit Costs

Accounting cost (cash) needed to produce a good or service

Implicit Cost

Value of what you give up producing

Accounting Profit

Total revenue (sales) - total cost of production

AP reported on

Income Statement

Total accounting profit =

Revenue - explicit costs

Economic Profit

Total revenue - total opportunity cost

Economic profit =

Revenue - explicit cost - implicit cost

EP signal

Where resources are most valued

Value of a dollar

worth as much as max value

Frederic Bastiet

Seen (explicit) and unseen (implicit)

Marginal Analysis

Measuring effect of an incremental adjustment to a plan

Marginal benefit

Change in total benefit when we increase action by 1 unit

Marginal Cost

Change in total cost when increase action by 1 unit

Objective Function

Maximize profit

Value of Money

Varies by Time

People don’t like waiting

uncertainty about future

Mishel marshmallow experiment

5 year olds given marshmallow and have to wait 5 mins to not eat and they will get more

Comparing costs and benefits

Opportunity cost of waiting

Present Value =

Future Value/(1 + interest rate)

Utility

Receive from consumption denominated in dollar

Marginal Utility

Extra utility you receive

Indifference Curve

Equal utility for different combinations of consumptions

Marginal Rate of Substitution

Slope of an indifference curve

Budget Constraint

Represents all the combinations

Slope of budget line

Ratio of consumption prices

Marginal utility per dollar spent

Product is equal

Marginal benefit =

Marginal Cost

Price Changes

1. How much we can buy

2. Amount of utility

Production function

Relationship between inputs (labor or capital) used and output (quantity)

Q =

F(K,L)

Produce on the procudtion function

Minimal output of inputs

Use the right level of inputs

Efficient use of inputs

Inputs

Things used to transform raw materials into finished products

L

Labor

K

Kapital

A

Automatic - technology

T

Terra - land

Marginal Product

Increase in output when adding 1 more unit of input

Increasing marginal product

Marginal product of that input get larger

Diminishing marginal product

Marginal product of that input gets smaller

Negative Marginal Product

One additional of input is added, marginal product of input is negative

Value marginal product

Selling value of extra output produced

MP(L) =

Change in Q / Change in L

VMP (L) =

Price * MP(L)

VMP(K)/Rent =

VMP (L)/Wage

Cost Function

Cost of production as a function of inputs used

Variable cost

Cost that varies with output

Fixed Cost

Cost that does not vary with output

Total cost

Total of variable and fixed cost

Average total cost

Total cost/total output

Average variable cost

Variable cost/total output

Average fixed cost

Fixed cost/total output

Marginal cost

Extra cost of producing one additional unit of output

MC<ATC

ATC is decreasing

MC>ATC

ATC is increasing

MC=ATC

ATC is at minimum

Sunk Cost

Portion of fixed cost that is not recoverable

Sunk Cost examples

Time, reputation, spent money

Long run cost

Optimal mix of inputs for all output

Short run cost

Fix costs cannot be adjsuted

Long run cost

Fixed cost can be adjusted (become variable)