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Class Notes - 10-17-07

Class Notes - 10-17-07 - Microeconomics Class Notes CHAPTER...

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Microeconomics – Class Notes – 10/17/07 CHAPTER 6: Firm Behavior (Continued) III. Producer Surplus - Producer Surplus (P.S) = (Price) – (Marginal Cost) for all unites o Price is the benefit from the individual unit o Marginal cost is the cost of the individual unit o Firms will supply units until P = Marginal Cost (this limits production such that they will not produce past the point where M.C is greater than price) o Marginal cost increases as you increase variable cost. A. Producer Surplus ( DOES NOT EQUAL ) Profit * Because P.S does not include fixed costs B. Example 1: Individual firm’s Producer Surplus P = $16 Quantity Total Cost Marginal Cost Relationship of Marginal Cost to Price (M.C (blank) P) Producer Surplus (Price – M.C) 0 10 - - - 1 16 6 < ($16 – 6) = 10 2 25 9 < ($16 – 9) = 7 3 43 18 > (We do not produce this unit because the M.C is greater than the price) - Benefit from the last unit is price * As soon as the Marginal cost is greater than the price, we stop production – so, even though the price = M.C is somewhere between unit 2 and 3, because the M.C is greater
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