Reviewch9-12

Reviewch9-12 - Class Notes Class Outline Review Ch.9-12...

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4/07/2008 Class Notes Class Outline Review Ch.9-12 Chapter 9: Output and Costs Economic Profit vs. Accounting Profit Firm’s objective: Max Profit Profit= Revenue- Costs According to what we learned costs may have different nature. Thus we distinguish between two concepts of Profit: 1. Accounting Profit= Revenue- Explicit Costs 2. Economic Profit= Revenue- Economic Costs Production Short-run In the long run all inputs are variable. However, in the short run some inputs are fixed. Assume: capital, natural resources and entrepreneurship are fixed in the short-run; labor is the only mobile factor in the short-run; Short-run Technology Constraint The relationship between output and quantity of labor employed can be analyzed recurring to 3 concepts: 1. Total Product 2. Marginal Product of Labor 3. Average Product of Labor Def. Total Product (TP, henceforth) The TP is the max output that a given quantity of labor can produce.

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Def. Marginal Product of Labor (MP L , henceforth) The MPL is the increase in the total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same. Law of Diminishing Returns : As a firm uses more a variable factor with a given quantity of the fixed factor of production, the MP of the variable factor eventually falls. Sunny Mirrors Inc. assembles and installs solar panels for water heating in the Dane county area. It uses two inputs, machines and labor. In the short run the number of machines they use is fixed. Labor Output (# of panels) Marginal Product of Labor (# of panels) 0 0 1 100 2 140 3 150 4 440 1. The marginal product of the 4 th worker is a. 60 solar panels. b. 50 solar panels. c. 150 solar panels. d. 40 solar panels. Def. Average Product of Labor (AP L , henceforth) The average product of labor is equal to total product divided by the quantity of labor employed. 2. If the marginal product curve is __________ the average product curve, then the average product curve is __________. a. above; falling b. above; rising c. below; rising d. None of the above Short-Run Cost
We describe the relationship between output and cost by using three related concepts: 1. Total Cost 2. Average Cost 3. Marginal Cost 1. Total Cost Def. Total Cost The total cost (TC) is the cost of all the factors of production a firm uses. Total cost is separated in Fixed and Variable cost: Def. Fixed Cost (FC) The fixed cost is the cost of the firm’s fixed factors. Def. Variable Cost (VC) The variable cost is the cost of the firm’s variable factors. TC=FC+VC 2. Average Cost Def. Average Total Cost (ATC) The average total cost (ATC) is the total cost per unit of output. ATC= TC Q The total cost is separated in Average Fixed Cost and Average Variable Cost: Def. Average Fixed Cost (AFC) The average fixed cost is the total fixed cost per unit of output. AFC=

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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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Reviewch9-12 - Class Notes Class Outline Review Ch.9-12...

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