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Unformatted text preview: Unit 2 Intro to Micro Lecture Chapter 13- Technical details about supply - Relationships between inputs and outputs is just part of the story- What we’re trying to do is maximize profit; find relationship between costs and revenue - How an Economist views a firms: o Explicit costs (same as accountant) o Also weigh opportunity costs (Implicit costs) o Economic Profit = Revenue – (Implicit + Explicit costs) - How an accountant views a firm: o Explicit costs: costs for land, workers, machines, rent o Revenue = difference between revenue and costs - Relationship between Marginal Physical Product and Marginal Cost- Labor and Capital (inputs) have direct relationship to total output - Marginal Physical Product (MPP) = derivate of change in output vs labor (dq/d l ) - Marginal Cost (MC) = wage paid/ MPP (dq/d l ) o When added labor increases MPP, MC will go down o However, when MPP (change in output) goes down, MC goes up- Above principle shows the Law of Diminishing returns o Eventually MPP will decrease and MC will rise - Average Fixed Costs= always cross MC at lowest point Chapter 14- Perfectly competitive market= perfectly inelastic demand o Multiplying output by 10 = multiply TR by 10 - In normal situation, if MC= ATC and S=D, firm is receiving profits for its services, but there is no excess profit to be made by another firm - If (from that equilibrium), Demand shifts to the right, MC will increase, and become more than ATC, but businesses are willing to do It because of the increase they get in price, profits increase- Profit increase= Q x (P-ATC)- Now, profits in this industry are greater than in other industries- As a result, will lead to more firms wanting to come in - New influx of firms creates a shift outward in the supply curve o This shift causes price to drop for all other firms in that industry o Reach a new equilibrium point at same point on supply curve o Now market is back to original equilibrium setting, only there are more firms getting normal profits o Therefore, prices remain constant, but output can be constantly increasing o Long run supply then becomes perfectly elastic (two conditions, make sure to look up) o This process is the engine of a capitalistic society o Entrepreneurship leads to the most efficient output of society - Why then, in the long run, would supply curve be upward sloping? o Some resources used in production may be available in limited quantities (we assume all firms have equal oppurtunities to same production costs) o Firms may have different costs - As long as marginal firm is having profits that return to entrepreneurial skills, market is in equilibrium o Some firms are making more profits- However, assumes that any firm that comes into the industry will not profit - Says that any firm that comes into the industry will not profit - If US closes its market to foreign markets, then output of American products will increase...
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This note was uploaded on 12/13/2010 for the course ECON 1110 at Cornell.