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### Class Notes - 10-10-07

Course: ECON 100, Fall 2007
School: Allegheny
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Word Count: 410

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Microeconomics Class Notes 10/10/07 Total Costs 1.) Explicit costs +implicit costs a. Implicit costs (Consist of Opportunity Costs) b. When we talk about Total Costs 2.) Total Cost is also calculated as T.C = Fixed Costs + Variable Costs Fixed costs (F.C): Costs that don't vary with output o Example: Rent for the building (contract to pay, does not change) Variable costs (V.C): Costs that increase as we increase...

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Microeconomics Class Notes 10/10/07 Total Costs 1.) Explicit costs +implicit costs a. Implicit costs (Consist of Opportunity Costs) b. When we talk about Total Costs 2.) Total Cost is also calculated as T.C = Fixed Costs + Variable Costs Fixed costs (F.C): Costs that don't vary with output o Example: Rent for the building (contract to pay, does not change) Variable costs (V.C): Costs that increase as we increase production o Example: Labor costs (higher more workers), purdchase more materials 3.) Time period will determine which costs are fixed and which are variable costs. Period of Time o 1.) Short run: At least one input is fixed. o 2.) Long run: All inputs are variable. Can change capital decisions in the long run 4.) Assumption regarding costs: Inputs are Capital (K) and Labor (L) o In the short run, Capital is a fixed cost and Labor is a variable cost Example: The amount of machinery you have is fairly fixed If you want to change production, you will change the number of workers you have hired. Capital This reference is just physical capital 5.) Total Cost = FC + VC [ELABORATION ON THIS EQUATION] Prices of inputs multiplied by the quantities of inputs o TC = (Prices of inputs [Capital]) * (Quantity of inputs [Capital]) + (Prices of Inputs [Labor]) * (Quantities of Inputs [Capital]) o (Price of Capital) = Interest (r) Q: WHY DO WE CALL THIS INTEREST? o (Prices of Labor) = Wage (w) o T.C = [(r) * K] + (w * L) 6.) Marginal Costs (MC) This is the cost of one more unit of production o This is the increase in cost for one additional unit of output o M.C = (The change in Total Cost [T.C]) / (The change in Quantity) Example: Firm Quantities Fixed Costs Variable Total Marginal Costs Cost Cost (Change in T.C) / (Change in Q) 0 10 0 10 1 10 6 16 6 2 10 15 25 9 3 10 30 40 15 4 10 54 64 24 The marginal cost increases as production increases. ALWAYS START AT ZERO in order to evaluate the change in M.C NEW EQUATION FOR Marginal Cost: o Marginal cost can also be calculated in this way: M.C (The change in Variable Cost) / (The change in Quantity) E. Production Function (Firms wish to MAXIMIZE PROFIT based on the Production Function) - Describes how much output is produced for any combination of inputs. 1.) (Firm Quantity [q] ) = f(K, L) Firm quantity is a function of capital and labor o We are only required to know what the production curve means 2.) In the Short Run: Capital is fixed Get MORE NOTEBOOK PAPER FOR ALL OF YOUR NOTEBOOKS!!!
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