Wk3 - Production and Costs

What is marginal benefit (MB)?

The additional benefit gained from consuming one more unit of a good.

What is the formula for marginal benefit?

MB = Change in Total Benefit / Change in Quantity.

What is diminishing marginal benefit?

Each additional unit consumed generally provides less extra benefit than the previous unit.

Why does willingness to pay often fall as consumption increases?

Diminishing marginal benefit: additional units become less valuable to the consumer.

How can recent consumption affect willingness to pay?

Satiation can reduce how much someone is willing to pay for another unit.

What is the consumer's optimal purchasing rule?

Keep buying while MB ≥ Price. Stop before the next unit whose MB is below Price.

What happens when marginal benefit is less than price?

The additional unit costs more than its benefit, so the consumer should not buy it.

Why does the demand curve represent marginal benefit?

It shows the maximum price consumers are willing to pay for additional units.

Total benefit rises from $100 to $180 when quantity rises from 1 to 2. Find MB.

$80.

A product has successive MBs of $100, $80, $60 and $40. At a price of $65, how many units should be bought?

2 units, because the third unit's MB is below $65.

A product has successive MBs of $90, $70 and $50. At a price of $60, how many units should be bought?

2 units.

If MB = 20 − Q, what is the corresponding inverse demand equation?

P = 20 − Q.

What causes a movement ALONG the demand curve?

A change in the good's own price.

What causes the entire demand curve to SHIFT?

A change in a non-price determinant of demand.

What is the difference between demand and quantity demanded?

Demand refers to the whole curve; quantity demanded refers to an amount at a particular price.

What are the five main demand shifters?

Tastes, substitute prices, complement prices, income and expectations/information.

What happens when a product becomes more popular?

Demand shifts right.

What happens when consumers develop negative preferences toward a product?

Demand shifts left.

What are substitute goods?

Goods that can replace each other in consumption, such as butter and margarine.

If the price of butter rises, what happens to demand for margarine?

Demand for margarine increases and shifts right, assuming they are substitutes.

What are complementary goods?

Goods commonly consumed together, such as printers and ink.

If printer ink becomes more expensive, what happens to demand for printers?

Demand for printers decreases and shifts left.

What is a normal good?

A good for which demand increases when consumer income rises.

What is an inferior good?

A good for which demand decreases when consumer income rises.

What happens to demand for a normal good when income rises?

Demand shifts right.

What happens to demand for an inferior good when income rises?

Demand shifts left.

New research reveals serious health risks from a food product. What happens to demand?

Demand shifts left due to negative information.

The price of coffee itself increases. Does its demand curve shift?

No. Quantity demanded falls through a movement along the existing curve.

The price of tea rises and tea is a substitute for coffee. What happens to coffee demand?

Coffee demand shifts right.

How is market demand calculated?

Horizontally add individual quantities demanded at each price.

When adding demand curves, do you add prices or quantities?

Quantities at the same price, not prices at the same quantity.

What is a choke price?

The price at which an individual's quantity demanded becomes zero.

Why can market demand curves have kinks?

Different consumers enter or exit the market at different choke prices.

What should you do if an individual's demand equation gives a negative quantity?

Set their quantity demanded to zero before adding market demand.

Two consumers have q1 = 30 − P and q2 = 50 − 2P. At what price does market demand kink?

P = 25, the lower choke price.

Two consumers have q1 = 30 − P and q2 = 50 − 2P. What is market quantity at P = 20?

20 units: 10 from each consumer.

What is the shortcut for N identical consumers?

Market quantity = N × individual quantity demanded.

Five identical consumers each have q = 20 − P. What is market demand?

Q = 100 − 5P.

Why do identical consumers' demand curves produce no market-demand kink?

They all reach zero demand at the same choke price.

If inverse demand is P = 40 − 2q, what must you do before horizontal summation?

Rearrange to q = 20 − P/2, then add quantities.

What is a production function?

A relationship showing the maximum output a firm can produce from given inputs.

In Q = f(K,L), what do K and L represent?

K = capital; L = labour.

What is the short run in production?

A period when at least one production input is fixed.

What is the long run in production?

A period when all production inputs can be adjusted.

What is a fixed cost?

A cost that does not change with output in the short run, even when production is zero.

What is a variable cost?

A cost that changes with the quantity produced.

What is marginal cost (MC)?

The additional cost of producing one more unit of output.

What is the formula for marginal cost?

MC = Change in Total Cost / Change in Quantity.

Total cost increases from $100 to $125 when output rises from 10 to 15. Find MC per unit.

$5 per unit.

What is short-run marginal cost (SRMC)?

The extra production cost when at least one input remains fixed.

What is long-run marginal cost (LRMC)?

The extra production cost when all inputs can be adjusted.

What is a price-taking firm's marginal production rule?

Produce an additional unit when Price ≥ Marginal Cost.

A price-taking firm faces P = $50 and MC = $65 for the next unit. Should it produce that unit?

No. The extra unit costs more to make than the revenue it earns.

How does marginal cost help explain a firm's supply decisions?

Firms are willing to supply additional units when the price covers their marginal cost.

What is the electricity merit order (bid stack)?

Generators ranked from lowest to highest marginal cost.

Why do low-marginal-cost electricity generators enter the merit order first?

They can profitably supply electricity at lower market prices.

Why can rooftop solar have a low marginal cost?

Sunlight has no fuel purchase cost, making the extra cost of generating electricity relatively low.

What is the key difference between consumer and producer decision rules?

Consumers buy while MB ≥ Price; producers supply extra units while Price ≥ MC.