Costs, Competitive Markets, and Monopolies

What do operational decisions involve?

Labor, capital, other inputs

Explicit costs

Tangible, out of pocket expenses (e.g. wages, utilities, advertising)

Implicit costs

Opportunity cost of doing business (e.g. owner’s time, cost of capital)

Accounting profit

Revenues - explicit cost

Economic profit

Revenues - (explicit + implicit)

marginal product

Amount of output associated with one additional unit of input

Fixed cost

Stays the same despite changes in output (e.g. rent)

Variable cost

Varies with production (e.g ingredients, seasonal labor)

Average total cost (ATC)

Total cost (TC)/Quantity

Average fixed cost (AFC)

Total fixed costs (TFC)/ Quantity (Q)

Marginal cost

Increase in cost from producing one more unity of output

Change in total cost divided by change in quantity

Scale

Size of production process aka where ATC is minimized

Economies of scale

ATC falls when production expands

Diseconomies of scale

ATC rises when production expands

Constant returns to scale

ATC doesn’t change

Why does ATC fall until hitting a minimum before rising again?

When MC is less than ATC, it pulls ATC lower and when MC is greater than ATC, it pulls ATC highe

Where does MC intersect with ATC

At the minimum point of ATC

What does marginal cost look like? Why?

Decreases to a minimum before curving up. As you produce more units, it falls but as you use more resources to produce less units, marginal costs increase

Perfect competition characteristics

Products are exact substitutes, there are many firms producing, and firms must take price set by the market

In a perfectly competitive market, a firm’s demand is

Perfectly elastic at the market price (horizontal) and equal to marginal revenue and average revenue

Where should markets produce (maximizes profit)

At the output where MR=MC

How to calculate MR (marginal revenue)

Total revenue (TR)/quantity

When are firms making a profit, operating in loss, and should shut down

Profit- Price > ATC

Loss- Price < ATC but >AVC

Shut down- Price < AVC