Exam 3 Notes Econ 2334

Exam 3 Notes Econ 2334 - Chapter 13: THE COSTS OF...

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Chapter 13: THE COSTS OF PRODUCTION Industrial organization: the study of how firms’ decisions about prices and quantities depend on the market conditions they face. A firm’s costs are a key determinant of its production and pricing decisions. The goal of a firm is to maximize profit. TOTAL REVENUE: the amount a firm receives for the sale of its output. TR = QP TOTAL COST: the market value of the inputs a firm uses in production. Curve gets steeper as the quantity of output increases because of diminishing marginal product. PROFIT: total revenue minus total cost. EXPLICIT COSTS: input costs that require an outlay of money by the firm. IMPLICIT COSTS: input costs that do not require an outlay of money by the firm. ECONOMIC PROFIT: total revenue minus total cost, including both explicit and implicit costs ACCOUNTING PROFIT: total revenue minus total explicit costs. Accounting profit is usually larger than economic profit. PRODUCTION FUNCTION: the relationship between quantity of inputs used to make a good and the quantity of output of that good. Gets flatter as the number of inputs increases, which reflects diminishing marginal product. MARGINAL PRODUCT: an increase in output that arises from an additional unit of input. DIMINISHING MARGINAL PRODUCT: the property whereby the marginal product of an input declines as the quantity of input increases. As the number of workers increases, additional workers have to share equipment and work in more crowded conditions. FIXED COSTS: costs that do not vary with the quantity of output produced. VARIABLE COSTS: costs that do vary with the quantity of output produced. ATC = TC/Q AFC AVC MARGINAL COST: the increase in total cost that arises from an extra unit of production = delta TC / delta Q ATC tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced. MC tells us the increase in total cost that arises from producing an additional unit of output.
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AVC typically rises as output increases because of diminishing marginal product. EFFICIENT SCALE: the quantity of output that minimizes average total cost. Whenever marginal cost is less than ATC, ATC is falling. Whenever marginal cost is greater than the ATC, ATC is rising. IT IS TRUE FOR ALL FIRMS. The marginal-cost curve crosses the ATC curve at the minimum of ATC.
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Decisions are fixed in the short run but variable in the long run. The long run ATC curve is a much flatter U-shape than the short run ATC curve. Firms have greater flexibility in the long run.
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Econ of scale higher production levels allow specialization among workers. Disecon of scale coordination problems LR ATC is falling at low levels of production because of increasing specialization and rising at high levels of production because of increasing coordination problems.
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This note was uploaded on 04/19/2008 for the course ECON 2304 taught by Professor Majumder during the Fall '07 term at University of Houston.

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Exam 3 Notes Econ 2334 - Chapter 13: THE COSTS OF...

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