UNF Profit Maximization, Cost Minimization, Cost Curves Flashcards
Describe total costs
total costs measure the sum of variable costs and fixed costs to a firm – written as c(y) = cv(y) + F
Describe average cost function
the cost per unit of output – c(y)/ y
- the sum of AVC + AFC – cv(y)/y + F/y
- U-Shaped diagram
Describe marginal cost
the change in costs due to an incremental increase in output
MC(y) = Δ c(y) / Δ y
MC(y) = Δ cv(y) /Δ y
- fixed costs do not change with Y
What is the relationship between the marginal cost curve and variable cost?
since the MC measures the cost of producing each added unit of output, we will get the TC of the product except the FC– which is VC
- Also stated as the integral of MC= VC (If the d. of VC =MC the integral of MC=VC)
The marginal cost curve intersects the average variable curve at its minimum level of output.
what is the relationship between marginal cost and average total cost
the marginal cost curve intersects the average cost curve at its minimum level of output.
Describe the relationship of short run and long run average cost curves
Since in the short run there’s fixed factors– the short run cost curve will always lie above the long run cost curve
Describe cost minimization
a technique to figure out the cheapest way to produce a given level of output given a production function f (x1,x2) = y , such that two factors of production (x1, x2) cost some amount [w1,w2]
What is an isocost line?
the combinations of inputs x1 and x2 that yields the same cost for the firm.
Derived from C= w1x1+w2x2
[ x2= C/w2 -w1/w2 (x1)]
What is the difference between the cost minimization in producer theory vs constrained optimization in consumer theory?
The consumer moves along the budget constraint to find the most preferred position because its their funds that have limited availability. The budget constraint is fixed, and the indifference curves move northeast [upward] to the tangency point. Some preferences will be unaffordable, we are finding the optimal bundle.
In cost minimization, the producer moves along the isoquant because they are constrained by technological feasibility. The curve is fixed, and the isoquant is moved southwest (downward). There are some points on the isoquant that are technologically unfeasible and we are trying to find the feasible level of output.
Describe the concept of constant returns to scale with cost functions
The cost function is linear in output because (tx1,tx2)=ty meaning any transformation in output= the transformation in input
the short run average cost curve will always lie …
above the long run average cost curve because in the short run we have more fixed factors.
What is the logic behind a firm’s profit maximization in perfectly competitive markets?
In perfectly competition, individual firms are price takers–meaning that they do not decide the price of their output, they take what is set by the entire market–called market price. The firm then must figure out the optimal level of output to produce. This is contingent upon the profit maximization problem– maxR(y)-C(y)– which essentially says that firms will only operate where marginal revenue equals marginal cost. Said differently, firms will operate where the extra revenue gained by one more unit of output equals the extra cost of producing another unit of output. If this condition did not hold, the firm could still always increase its profits by changing its level of output. However, since MR = p, the competitive firm will choose a level of output y where the marginal
cost that it faces at y is just equal to the market price.
In the case of perfectly competitive markets, marginal revenue is simply the
market price
Explain the exceptions to the rule that firms will only produce when p=MC?
1) If the MC curve is U-shaped, the point when the MC curve is downward sloping as p=MC, the firm will not choose this level since there is still room for more profit by increasing output. Firms will choose the level of output where MC is upward sloping – reason why the supply curve is upward sloping.
2) when the profits from producing are less than what the firm would face by shutting down and paying the fixed cost, the firm will not produce anything at all [y=0]. Said differently, the firm should go out of business when the revenues from producing don’t cover its variable costs.
If AVC > p , then the firm will.. because
not produce; the revenue gained by producing at that level of output does not cover the variable costs of production.
Explain producer surplus
Define partial eq’m
the market for a given good, holding prices in other markets fixed. Differs from general eq’m– how demand and supply conditions interact in several markets to determine the prices of many goods.
We can think of the supply curve as being determined by marginal ____ ; and the demand curve as being determined by the marginal ___
cost; benefit/utility
Explain each scenario of supply and demand shifts , and how eq’m changes
…
How does the impact of demand curve shifts depend on the relative elasticity of the supply curve
if a supply curve is more elastic [flatter]– then there will be greater changes in quantity than price
if a supply curve is more inelastic [steeper] then there will be greater changes in price than quantity.
Pop Quiz: if a newspaper reports that in a given month, there were 50,000 jobs created. What might be the viewer’s reaction vs reality?
While that may seem like a lot, when the viewer realizes that the economy has to generate more than 100,000 jobs a month just to keep in pace with economic growth, the impact is no longer there
Why can firms with different cost functions still be represented by a single market supply curve?
all firms must be operating at p=MC, meaning that all must have the same cost of producing their last unit of output– represented by MC. Since firms are price takers, the price a consumer pays for a good–set by the market– must equal the cost firms incur to bring the marginal good to the market.
What is the relationship between market eq’m and pareto efficiency?
All transactions made at the market eq’m are pareto efficient because mutually beneficial trades are happening and there is no way to make any person better off without hurting the others.
Define pareto improvement
is a change in the allocation of goods that harms no one and benefits at least one person.
What is the central role of price in markets?
1) ration scarce resources to consumers who “value” [money creates value, income-> value] goods the most.
2) provide allocative signals to firms, telling producers when to produce more or less [p=MC(y)]
Define Comparative statics
how changes in the market affect eq’m price and quantity.
Comparative statics Explain some of the consequences of price changes in the market with price controls: price ceilings
Price ceilings can cause extreme shortages of necessities in countries. For example, in 2008 when Venezuela’s government set price controls on food to account for difficulties in agricultural production– citizens faced extreme shortages in necessities such as milk, rice, and sugar. It caused many to start smuggling along the border with Columbia.
Explain the effects on immigration
