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Unformatted text preview: Graph 25-SEP-2007 #2: Cost curves are mirror images of production curves. o Average variable cost = amount on money spend on item produced. o In the average total costs, fixed costs are included. That is why it is higher than AVC. o Fixed expenses do not change with the production. Example: a tractor, barn, etc. o Average fixed costs (AFC) falls and never rises. o ATC and AVC get closer together. Markets: imperfect and perfect. Perfectly competitive market: o Characteristics: Lots of buyers and sellers. Homogeneous products (in the eyes of the consumer every brand is of equal quality). Example: toothpaste, bread, milk. This is very subjective. Depends on how the consumer feels towards the product. The producer of a homogenous product does not need to be advertized because it does not make a difference to the consumer. No barriers to entry. Anyone can start one of those businesses. When many companies enter the market, the price declines. Example: beanie babies. Many profits, few companies producing them. Therefore, many jump in and prices fall. Normal profit: minimum amount needed to stay in a certain business; therefore it is a "cost" of production. The normal profit is fixed. Every owner establishes that number, directly or indirectly. The owner pays himself using the profits. Pure profit, economic profit or economic rent: It equals profits beyond normal profits. Includes any profit in excess of normal profit. Basically what is left after the owner takes his money. Page 154. The seller is a price taker. If every product is homogenous, the buyer will buy the cheapest one. The consumer is a price taker he takes the price the market establishes. Chart #3 homogenous product. Average revenue = marginal revenue. This is only true in a perfectly competitive market. The demand curve is also the marginal product curve. ...
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This note was uploaded on 04/11/2008 for the course AAEC 1005 taught by Professor Mjellerbrock during the Fall '07 term at Virginia Tech.
- Fall '07