Chapter 6 Flashcards
why is producer theory important?
Because producers decide on how much of each commodity to sell and how much to produce and this impacts how much resources that are used (labor, capital, technology) to produce that particular good/service
We want these resources to be allocated to maximize societies well-being.
Understanding producers decisions
Rational consumer
(demander/buyer) makes decisions that maximize its own utility given their limited budget (time & money)
Rational producer
(supplier/seller) makes decisions that maximize its own profit given the demand
Two important determinants for profit maximization
- The additional cost to produce one more unit - determined by its production function and the price of inputs. Marginal cost!
- The additional benefit gain by selling that additional unit on the market - depending on the price consumers are willing to pay. Marginal revenue!
Important divison when talking about costs in economics
Accounting costs
Opportunity costs
accounting costs
explicit cost
ex
salaries
capital costs
local costs
opportunity costs
implicit costs
○ The value of the best option, the value we give up by using resources in the way we do
production
Production is process that converts inputs into outputs
production function
The two inputs can then be combined in a number of different ways
How much production we get out depends on:
The exact form of the production function
How much we use of each input product
production function mathematical way
How much we get out of the labor and capital
Like the utility function for firms
Q = f (K,L)
Production in the short run
A period of time during which at least on of the firm’s factors of production is fixed
Production in the long run
A period of sufficient length in which all inputs are variable
fixed factors of production
an input whose quantity can not be altered in the short run. Often capital (K)
variable factors of production
an input whose quantity can be altered in the short run.
Law of diminishing returns
When some factors of production are held fixed, the variable factor will at some point return a lower unit of output per added unit of input
The cost function
Total cost: TC = r * K + w * L
Total cost
The sum of all payments for all inputs
Fixed cost + variable cost
Fixed cost
The sum of all payments for fixed inputs
Often the capital cost, like the 100 units of capital in the example
Variable cost
The sum of all payments for variable inputs
The total labor cost
Marginal cost
The change in total cost divided by the change in output
Profit-maximization graphically
Profit = TR - Variable cost VC - Fixed cost FC
Profit-maximization mathematically - slope for the cost curve
- Slope for the cost curve show how much the total cost change when quantity produced (Q) changes with one unit
Marginal cost: MC = dTC/dQ = TriangleTC/TriangleQ
Profit-maximization mathematically - slope for the revenue curve
- Slope for the revenue curve shows how much the total revenue changes when quantity produced (Q) changes with one unit
Marginal revenue: MR = dTR/dQ = TriangleTR/TriangleQ
Profit maximizing - supply curve
learn it in one note
Average costs
AFC, AVC and ATC
Profit mX - Market supply curve
Supply curves will be MC as long as MC > AVC
