2024-12-06 15.29 TINY SCANNER

Average Variable Cost (AVC)

  • Definition: The average variable cost represents the variable costs (costs that vary with output) per unit of output.

  • Formula:

    • AVC = VC / y, where VC = Variable Cost

    • Example: d(y,w) = -3/2 + W2X2

Fixed Cost (FC)

  • Definition: The fixed cost is the cost that remains constant regardless of the level of output.

  • Formula:

    • AFC = FC / y = W2X2 / y

Marginal Cost (MC)

  • Definition: Marginal cost is the cost of producing one more unit of output.

  • Example:

    • MC = 3w,yzX2 - 2y

Minimization of AVC

  • Condition: AVC is minimized when d(AVC)/dy = 0.

  • Result:

    • AVC is minimized when y = 3/2

Marshallian Demand

  • Formula:

    • MRS = x22 = X2 = P, X2P2 = 2p,x, 2x,x2

  • Equation:

    • m = X1P1 + 2x2P2

    • m = 3p,x, 5 X2 = m

Finding Demand

  • Example:

    • If m = $1500, using prices P1 = $50, P2 = $75, X1° = 10 and X2° = 5, we find the quantities based on budget constraints.

Hicksian Demand

  • Definition: The Hicksian demand focuses on achieving a certain utility level with minimum expenditure.

  • Derivation:

    • Uses utility function u[u° - h1, h2] and establishes relationships between prices and quantities.

Average Cost (AC)

  • Definition: Average cost is the total cost divided by the number of units produced.

  • Example:

    • AC = S hi(p,u) dp

Revenue Concepts

  • Total Revenue (TR): Total amount earned from selling goods.

  • Example:

    • TR = p1x1 + p2x2

Elasticity of Demand

  • Definition: Price elasticity measures how the quantity demanded of a good responds to changes in its price.

  • Example:

    • If demand elasticity is -0.5, then for a 30% increase in price, the quantity demanded would decrease by 15%.

Perfect Substitutes and Complements

  • Perfect substitutes: Goods that can replace each other with no loss of utility.

  • Perfect complements: Goods that are consumed together.

Cost Function Analysis

  • Definition of marginal product: The additional output from an additional unit of input.

  • Comparison of marginal products helps determine optimal input combinations.

Example Application of Demand Theory

  • Change in income or prices affects quantity demanded; calculate using utility functions and MRS.

  • Example: If initial income is $40, changing prices and income tests demand effects.