micro CRAM unit 3

inputs

resources that go into making a product (ie factors of production)

output

the products created from the resources

• when sold, they produce PROFIT.

variable costs

resource costs that increase w/ increased production (like ingredients)

law of diminishing marginal returns

with every new variable/input resource added to increase production, total product will peak and then fall.

total product (TP) =

output

Average product (AP) =

Total Product// units of labor

• output per unit of input

marginal product (MP)

Change in total product// change in inputs

• additional output generated by each individual

short-run

period during which at least one input is fixed, affecting production capacity.

• ex: factory size is fixed so it can’t change

long-run

period of time in which inputs can change

• ex: you can build a bigger factory and hire more workers

fixed cost

resource costs that stay constant regardless of production (like rent or salaries)

fixed input

an input whose quantity doesn’t change

• a pizza oven in a pizza shop

variable input

an input whose quantity CAN change

• workers in the pizza shop- you can always hire more or fire some

total cost formula

TC = fixed costs (FC) + variable costs (VC)

marginal cost

cost difference of one additional unit of output (Change in TC//Change in Quan. produced)

ATC formula

ATC = AFC + AVC

ATC formula 2

ATC = TC//Q

AFC

AFC = FC//Q

AVC

AVC = VC//Q

MC must always cross ATC and AVC on the graph at their….

MINIMUM POINTS

increasing returns to scale

investment gets more output than what was invested

decreasing returns to scale

investment gets less then what was invested

constant returns to scale

investment gets the same as what was invested.

long run average total cost (LRATC)

same as short run ATC, but bigger

economies of scale

LRATC declines as outputs increase

diseconomies of scale

LRATC increases as output increases.

constant returns to scale

when LRATC falls to its lowest pointc

costs in the long run

businesses start using mass production techniques and use more technology

profit

excess revenue that a business gets to keep

accounting profit

• the profit a business makes based on money earned and money spent

• accounting profit = total revenue - explicit costs

economic profit

• profit that includes both money costs and the value of what you gave up (opp costs)

• economic profit = total revenue - (explicit + implicit costs)

normal profit

economic profit = 0

profit maximization rule **

MR = MC

• where a firm aims to increase revenue due to costs being possibly high

shut down rule

a business (or firm) should continue to produce while the price (P) is above the AVC

• when the firm is losing money and taking a loss, they should continue to produce until TR equals FC

barriers to entry

market factors which will make it difficult to join the market or leave it.

• ex: food trucks (low barriers) or power plants (high barriers)

• low barriers mean high competition and less profit

marginal revenue

additional revenue from producing one more unit

• where MR is depends on market structure

market structure

basic economic infrastructure by which an individual industry organizes itself.

• four general *

  1. perfect compeition

  2. monopolistic compeition

  3. oligopoly

  4. monopoly

profit maximization characteristics

1. if the P is below AVC, then the rule does not apply

2. all market structures will have profit maximized at MR=MC

3. in perfect comp, we can reorder the rule to be P=MC

perfect competition

many identical firms are competing at a constant market price.

• some characteristics of perfect comp are…

  • producers don’t need to advertise much if any

  • many many small firms/businesses

  • low barriers to entry

  • price TAKERS

barriers to entry characteristics:

1. gov’t actions - regulations, contracts, and patents. patents give inventors right to their own idea and prevents other companies from copying the idea.

2. better technology - some companies have an advantage because of access to tech

3. access to raw materials or location - oil is expensive b/c it is only in certain places, corn is all over the place

4. economies of scale - the bigger the company, the easier to cut costs quickly per unit with mass production technologies.