Lecture_3_handout - EC1301 Principles of Economics Lecture...

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B. T. Lim, Dept of Economics, NUS 1 EC1301 Principles of Economics Lecture 3 Perfect Competition I: Cost of Production and Supply Textbook, Chapters 23 and 24
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B. T. Lim, Dept of Economics, NUS 2 Agenda 1. Introduction 1. The Firm 2. The Benefit and Cost of the Firm’s Decision 2. Cost of Production 1. Production in the Short Run 2. Short-Run Cost of Production 3. Production in the Long Run 3. The Firm’s Supply 1. Short-Run Output Decision 2. Short-Run Supply Curve 3. The Long-Run Market Supply Curve
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B. T. Lim, Dept of Economics, NUS 3 1.1 The Firm The firm organizes resources it controls (inputs) to produce output of the good. The decision of the firm –Single owner, e.g., sole proprietorship –Two broad categories of resources the owner controls Owner’s own resources, such as funds, labor, land, etc Resources purchased from the input markets, such as capital, labour, land, etc –Costs of Production Implicit Cost – No monetary payment Explicit Cost – Firm pays for the resources with money Inputs Output Capital, Labor Widgets Production Function Cost Revenue Factors of Production Widget Market: Quantity Supplied INCENTIVE: Surplus = Revenue - Cost
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B. T. Lim, Dept of Economics, NUS 4 1.2. Benefit and Cost of the Firm’s Decision Profit (economic profit) Total revenue minus economic cost Cost (economic cost) The opportunity cost of employing the inputs used to get the output. The sum of explicit cost and implicit cost. explicit cost The actual monetary payment for inputs. implicit cost The opportunity cost of inputs that do not require a monetary payment. accounting cost
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B. T. Lim, Dept of Economics, NUS 5 2.1 Production in the Short-Run marginal product of labor The change in output from one additional unit of labor. diminishing returns As one input increases while the other inputs are held fixed, output increases at a decreasing rate. Short-Run: Situation where the input rate of only one factor of production can be varied.
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B. T. Lim, Dept of Economics, NUS 6 A Firm with a Fixed Production Facility: Short Run Total, Marginal and Average Product Quantity of Quantity of Marginal Average Labour, L Output, Q Product Product (No. of workers) (No. of widgets) of Labor of Labor 00 15 11 5 15.0 17 23 2 16.0 15 34 7 15.7 13 46 0 15.0 11 57 1 14.2 9 68 0 13.3 7 78 7 12.4 5 89 2 11.5 Increasing returns due to specialization Diminishing returns
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B. T. Lim, Dept of Economics, NUS 7 A Firm with a Fixed Production Facility: Short Run Total, Marginal and Average Product Curves Total Product Curve -5 5 15 25 35 45 55 65 75 85 95 012345678 Number of Workers Number of Widgets total-product curve The graph of the relationship between the quantity of labor and the quantity of output produced, ceteris paribus .
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B. T. Lim, Dept of Economics, NUS 8 A Firm with a Fixed Production Facility: Short Run Marginal and Average Product Curves 0 2 4 6 8 10 12 14 16 18 012345678 Number of Workers Number of Widgets Marginal Product Average Product Observe the geometrical relationship between the two curves
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B. T. Lim, Dept of Economics, NUS 9 2.2. The Short-Run Cost of Production fixed cost ( FC ) Cost that does not vary with the quantity produced.
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This note was uploaded on 03/19/2012 for the course ARTS EC1301 taught by Professor Forgot during the Fall '08 term at National University of Singapore.

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Lecture_3_handout - EC1301 Principles of Economics Lecture...

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