Chapter 6 Outline-Perfectly Competitive Supply

Chapter 6 Outline-Perfectly Competitive Supply - Perfectly...

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Perfectly Competitive Supply: The Cost Side of the Market Chapter 6 Firm Theory Basics Resources have opportunity costs. A firm will be able to hire a resource as long as the resource owner is paid at least as much in that use as it could earn in its second best use. Profit=Total Revenue – Total costs Costs include explicit costs and implicit costs Explicit costs are actual cash payments Implicit costs are non-monetary costs and include opportunity costs Firm Theory Basics Accounting profit = Total revenue – explicit costs Economic profit = Total revenue – explicit costs – implicit costs Economic profit = Accounting profit – implicit costs If a firm earns zero economic profit, then it is doing as well as it could do in its second best choice. I.e. zero eco profit is okay! Firm Theory Basics Variable resources can be easily and quickly adjusted to change the output rate of the firm Fixed resources take time to adjust to change the output rate of the firm The Short Run is a period during which at least one of the firm’s resources is fixed The Long Run is a period during which all resources under the firm’s control are variable Firm Theory Basics The Production Function shows the relationship between the amount of resources employed and the output produced Output may also be called total product Marginal product is the change in total product (output) that occurs when the use of a particular resource increases by one unit, holding all other resources constant. Marginal Returns to Resource Usage Units of Variable Resources Total Product (Output) Marginal Product 0 workers 0 - 1 400 400 2 900 500 3 1300 400 4 1600 300 5 1800 200 6 1900 100 7 1950 50
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8 1850 -100 Production in the Short Run The Law of Diminishing Returns states that as more of a variable resource is added to a given amount of a fixed resource, the marginal product of that resource eventually declines and could become negative The Law of Diminishing Returns is the most important feature of production in the short run. Production in the Short Run When marginal product is increasing, total product increases at an increasing rate When marginal product is decreasing, total product increases at a decreasing rate When marginal product turns negative, total product decreases Production in the Short Run Fixed cost is the sum of all payments made to the firms fixed resources. These costs must be paid even if no output is produced. Fixed costs remain constant no matter how much or how little output is produced. Variable costs are the sum of all payments made to the firms variable resources As output increases, must hire more variable resources and variable costs will increase. Production in the Short Run
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Chapter 6 Outline-Perfectly Competitive Supply - Perfectly...

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