Week 5: marginal values Flashcards
Profit
= TR - TC
Revenue
the currency a firm receives in exchange for selling its output
Total revenue
• if a firm sells all of its output at the same price, then TR = P * Q
• if a firm sells different categories of output at different prices, then TR = P1 Q1 + P2 Q2 + P3 Q3 + … Pn Qn
Average revenue
• AR = TR / Q
• if a firm sells all products at the same price, then AR = TR / Q which works out to P * Q / Q = P
• expressed in terms of $ per unit
Marginal revenue
• MR = ΔTR / ΔQ
• the additional revenue a firm receives for selling one additional unit of output
• MR < P, but…
• MR is only equal to price when a firm confronts a perfectly elastic demand curve
• expressed in terms of $ per unit
Marginal Revenue in Perfect Competition Example
8 donuts at $2 each or 9 donuts at $2 each
MR = ΔTR / ΔQ
= ( 2.00 * 9 ) – ( 2.00 * 8 ) / 9 – 8
= 18 – 16 / 1
= $2.00
so you make an additional $2
For perfect competition
MR = AR = P = D
Costs in the Short Run
• fixed costs (costs of all fixed inputs)
• variable costs (costs of all variable inputs)
• total cost (fixed costs + variable costs)
Total Cost
• Total Cost is f(Q)
• Total Fixed Cost (TFC) is constant/not f(Q)
• Total Variable Cost (TVC) is f(Q)
• TC = TFC + TVC
Fixed costs
things you have to pay
ex. rent, loans
Variable Costs
costs for inputs that vary at each quantity of output
ex. wages, materials
FC Production curves
approaches zero but will never be zero
ex. on phone
Per-Unit Costs
• Average Fixed Cost
• Average Variable Cost
• Average Total Cost
Average Fixed Cost
AFC = FC / q
(fixed costs divided by total product)
Average Variable Cost
AVC = VC / q
(variable costs divided by total product)
Average Total Cost
• ATC = TC / q
(total cost divided by total product)
• ATC = AFC + AVC
(average fixed cost + average variable cost)
ATC Decreases
• as output increases because fixed costs are getting distributed across more units
• at a certain point ATC will start to increase as the firm incurs more variable costs to increase production
Production Curves of Per-Unit Costs
since AFC gets smaller and smaller with rising output, the gap between ATC and AVC will get smaller and smaller with rising output
Marginal cost
• the extra cost of producing another unit of output
• MC = ΔTC / Δq
(the change in total cost divided by the change in total product)
MC at low levels of output
may decrease as quantity increases; eventually MC will increase with output
Marginal Cost Curve
shaped like “J” or nike sign bc of the law of diminishing marginal returns (look at graph from slides)
Increasing returns to scale
output > inputs
Constant returns to scale
output = inputs
Decreasing returns to scale
output < inputs
Causes of Increasing returns to scale
• division of labour
• specialized capital
• specialized management
Cause of Constant returns to scale
whenever making more of a product means repeating exactly the same tasks
Causes of Decreasing returns to scale
• management difficulties
• limited natural resources
Curve of Increasing Returns to Scale
approaching zero
Curve of Constant Returns to scale
horizontal
Curve of Decreasing Returns to Scale
approaching infinity
Efficient Scale of Production (or productive efficiency point)
quantity of output that minimizes average cost when MC and ATC intersect
