mid term 2 - Economics 304K IMPORTANT POINTS TO...

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Economics 304K D. Hamermesh IMPORTANT POINTS TO REMEMBER--MIDTERM 2 Short-run -- some factors of production are fixed. Long-run -- all factors are variable. The firm seeks to maximize its economic profit -- its revenue minus the opportunity cost of all the inputs it uses. This is different from accounting cost. A firm produces by combining inputs given available technology. If all other inputs are fixed at pre-specified quantities, we can relate changes in output to changes in the one variable input. Each extra unit of input changes output by an amount called the marginal product (MP). The principle of diminishing returns says that the MP of this input will eventually decrease as more of it is used with a fixed amount of other inputs. Average product (AP) is defined as output divided by the amount of the single input that is variable in the short run. In the long run firms choose technologies -- the relative amounts of different inputs -- based on the inputs' relative prices. Where one input is cheap compared to others, businesses will produce in such a way as to use a lot of the input. Where it is relatively expensive, they will use relatively little of it. When the firm chooses the most efficient way of producing, it implicitly determines the cost of producing at each output. In the short run the amount of at least one of the productive inputs is fixed. This means that in the short run the firm incurs fixed costs whether or not it produces. The other inputs can be varied, yielding costs that increase with output (variable costs ). Total costs at each output are the sum of fixed and variable costs (TC = TVC + TFC). For purposes of analyzing how firms behave we use the following breakdown of costs: Average Total Cost = Total Cost/Output. Thus ATC = TC/Q, AVC = TVC/Q and AFC = TFC/Q.
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This note was uploaded on 01/25/2010 for the course ECON 54367 taught by Professor Hamermesh during the Spring '10 term at University of Texas.

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mid term 2 - Economics 304K IMPORTANT POINTS TO...

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