Focuses on production, perfectly competitive markets, and firms. Supplemented by a review booklet available for purchase.
Definition: Describes the relationship between labor quantity and output quantity.
Chart Example:
1 worker = 10 units of output
2 workers = 25 units of output
3 workers = 36 units of output
4 workers = 46 units of output
5 workers = 50 units of output
6 workers = 48 units of output
Definition: The additional output produced as a result of adding one more worker.
Calculation: Change in total product divided by change in labor quantity.
For 1st worker: 10 units (from 0 to 10).
For 2nd worker: 15 units (from 10 to 25).
Observed trends:
Increasing returns (specialization).
Diminishing returns (marginal product falls).
Negative returns (total product decreases).
Definition: The cost of hiring one additional worker.
Calculation: Wage paid divided by marginal product.
Relationship to marginal product curve:
Downward sloping during increasing returns.
Upward sloping during diminishing returns.
Fixed CostsDefinition: Unchanging costs regardless of output level (e.g. land, capital).
Variable CostsDefinition: Costs that vary with output level (e.g. labor, electricity).
Total CostsComposition: Fixed costs + Variable costs.Graph Representation: Fixed costs are horizontal; variable costs start steep and can plateau.
Marginal CostCalculation: Change in total cost divided by change in quantity.Resembles a Nike Swoosh in graph form (initially decreasing then increasing).
Average Variable Cost: Calculated by dividing total variable costs by quantity. Average Total Cost: Calculated by dividing total costs by quantity.
Graph relationships:
AVC intersects marginal cost at its minimum point.
ATC intersects marginal cost at its minimum point, indicating productively efficient production.
Long-Run: All costs are variable; firms can expand plants and production facilities.
Short-Run: Limited adjustments—can hire more workers or change production rates.
Economies of Scale: Decreasing average costs with increased production (increasing returns of scale).
Constant Returns to Scale: Average costs remain constant as inputs double.
Diseconomies of Scale: Increasing average costs as production expands beyond efficient capacity.
Accounting ProfitDefinition: Actual profit calculated as total revenue - explicit costs.
Economic ProfitDefinition: Includes both explicit and implicit costs, calculated as total revenue - (explicit costs + implicit costs).
Normal profit: occurs when economic profit is zero.
Key Principle: Marginal Revenue = Marginal Cost.
Marginal Revenue: Change in total revenue divided by change in quantity.
Economic profits lead to firm entry; economic losses lead to exit, impacting market supply.
Market Characteristics
Many firms with identical products.
Low barriers to entry.
Firms are price takers (cannot influence market price).
Market Graphs
Interaction of demand, supply, and firm graphs leading to profit maximization at intersection of marginal cost and marginal revenue curves.
Economic profit occurs when ATC < market price.
Economic loss occurs when ATC > market price.
Long-run equilibrium happens at zero economic profit.
Allocative efficiency: Price = Marginal Cost.
Productive efficiency: Firms produce at minimum average total cost in the long run.
Firm supply curve is the marginal cost curve above AVC minimum.
Impact of changes in demand on long-run supply curves:
Increasing demand leads to higher prices and more firms entering the market (shifting supply right).
Decreasing demand causes firms to exit, resulting in supply shifting left.
Long-Run Supply Curve: Typically horizontal at the minimum ATC for firms, indicating perfect elasticity at long-run equilibrium.