ECON 1101 Week 6 PN

ECON 1101 Week 6 PN - ECON 1101 Week 6 Perfectly...

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ECON 1101 – Week 6 Perfectly Competitive Supply: The Cost Side of the Market Frank, Jennings, and Bernanke: Ch 6 1
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6 2 Outline Costs curves in the short run Perfectly competitive markets Profit maximisation Demand curve for a firm in Perfect Competition The Supply Curve
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Costs and Profit Explicit (economic costs) Payments made to outsiders for inputs used by the firm (rent, labour, raw materials) Implicit (opportunity cost) The potential earnings of the firm’s resources if they had been rented out to someone else. (normal profit) Profit defined: The total revenue a firm receives from the sale of its product minus all costs – explicit and implicit – incurred in producing it 3
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4 Normal Profit the entrepreneur expects a minimum payment or return to remain in business normal profit is a cost because the business will not exist if there is no return to the owner economic profit is any amount above normal profit Normal profit occurs where AR =AC ECONOMIC PROFIT = TR - TC
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Costs of Production 5 Diane Enahoro From page 153 text
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The cost of fixed resources The Fixed costs are spread as output rises Diagram 6 Total Fixed Costs
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The cost of variable resources As the firm experiences diminishing returns , more variable inputs are required to increase output Variable costs grow more quickly as this occurs The VC curve becomes steeper   7 Total Variable Costs
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Average or per Unit Costs of Production Average Cost = Total Cost : Average Variable Cost =Variable Cost Output output Marginal Cost = change in Total Cost change in output 8 Diane Enahoro
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AFC = TFC Q “spreading the overheads” Diagram 9 Average Fixed Cost
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Average Variable Costs AVC = TVC Q Diagram 10 Average Variable Costs
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11 Average Total Cost ATC = TC/Q or AFC + AVC ATC ends up closer to AVC due to the decline in AFC   Declines, reaches a minimum and then rises
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12 Average Total Cost Diagram
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It falls at first
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ECON 1101 Week 6 PN - ECON 1101 Week 6 Perfectly...

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