Unformatted text preview: Principles of Microeconomics – Econ1014 Fall 2008 ‐ Sharon Ryan Summary of Weeks 8 to 11 The following is a summary list of the topics covered. Make sure you are comfortable with these topics. Your homework and quizzes will probably be your best guide to how well you understand the material. Review them and practice with them until you understand those problems and can comfortably answer them. 1. Calculating Profit (Accounting versus Economic) a. Accounting Profit • Interesting in financial viability of the business; interested in money flows; is the revenue earned enough to meet all the explicit financial obligations. • Accounting profit = TR – explicit cost b. Economic Profit • Interested in economic efficiency of business; interested in resource allocation; is this the best use of these resources • Economic profit = TR – (explicit cost + implicit cost) c. Rates of Return • Above normal: economic profit >0: you are earning more here than you could anywhere else • Below normal: economic profit <0: you are earning less here than you could elsewhere • Normal: economic profit = 0: you are earning the same here as you could at your next best opportunity, no better and no worse d. Examples of explicit costs • Dollars of wages paid to workers • Dollars paid for utilities • Dollars paid for taxes • Dollars paid for supplies • Dollars paid for rent • Dollars paid in interest for bank loan • Dollars of lost value on a vehicle when it depreciates e. Examples of implicit costs • Dollars of wages lost when business owner quits job in order to open and run this business • Dollars of rent lost when owner of business kicks out tenants to use own property for this business • Dollars of interest lost when owner of business takes own money out of bank to use for this business. f. Examples of opportunity costs All costs added together, both implicit and explicit, are counted as the opportunity cost of doing business. Notice that the accountant counts only the explicit opportunity costs while the economist counts all the opportunity costs. 1 2. Production Functions and Cost Curves a. The production function measures how much the firm can produce in the SR (when at least one input is fixed – usually the capital inputs) with different levels of variable inputs (usually the labor input) • The production function rises quickly when we get teamwork and specialization. • The production function rises slowly when we get crowding of fixed inputs. b. The slope of the production function measures the marginal product of labor (MPL), which is the change in output (Q) as we hire one more worker (L) • MPL rises when we get teamwork and specialization • MPL falls when we get crowding of fixed inputs c. The average product of labor measures how much each worker can produce on average (APL) • APL rises when MPL is above it • APL falls when MPL is below it • APL is highest when MPL crosses APL 65 Q SR production 60 function 55 50 45 40 35 30 25 20 15 10 5 L 0 1 2 3 4 5 6 7 8 9 10 2 Q 20 18 16 14 12 10 8 APL 6 4 MPL 2 L 0 1 2 3 4 5 6 7 8 9 10 d. The shape of the production function gives us the shape of the variable and total cost curves. $ TC 2600 2400 2200 VC 2000 1800 1600 1400 1200 FC 1000 800 600 400 200 0 5 10 15 20 25 30 35 40 45 50 55 60 65 3 Q e. The shape of the MPL function gives us the shape of the MC curve. • MC falls when MPL rises • MC rises when MPL falls • MC is lowest when MPL is highest f. The shape of the APL function gives us the shape of the AVC curve. • AVC and ATC fall when MC is below them • AVC and ATC rise when MC is above them • AVC and ATC are lowest when they cross MC g. The ATC curve is found by adding AVC to AFC. $ 130 120 110 MC 100 90 80 70 60 50 ATC 40 AVC 30 20 10 0 5 10 15 20 25 30 35 40 45 50 55 60 65 4 Q ...
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- Spring '08
- Microeconomics, Economic Profit, Sharon Ryan