SECTION V OUTLINE

# SECTION V OUTLINE - I SECTION V THE COMPETITIVE FIRM a...

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I. SECTION V – THE COMPETITIVE FIRM a. Marginal/Average Relationships i. Marginal – The change in total divided by the change in the number of factors (i.e. – Change in total points divided by the change in the number of quizzes) 1. If the marginal is about the average, the average is rising 2. If the marginal is below the average, the average is falling 3. If the marginal equals the average, the average is constant 4. The above rules hold whether the marginal is itself increasing or decreasing b. The Short Run and the Long Run i. The short run is defined as a time span such that the firm must incur a certain total fixed cost (TFC) regardless of its level of output 1. Total Fixed Costs (TFC) – Rent, loan payments, property taxes, must be paid regardless if production is zero 2. Total Variable Costs (TVC) – Raw materials, labor, transportation costs, costs which rise as output rises ii. The short run lasts until the firm has enough time to rid itself of all obligations iii. In the long run, all costs are variably by definition c. Short Run Total Cost and Total Variable Cost Curves i. Total cost represents the entire opportunity cost necessary to produce a given output 1. In the short run Total Cost = Total Fixed Cost + Total Variable Cost 2. Total cost always increases with output 3. In the short run we must always reach a point of diminishing returns d. i. Dividing TC=TVC+TFC by quantity we get ATC=AVC+AFC e. Short Run Marginal Cost Curves i. Marginal cost is the change in total cost divided by a small change in output where the change in output is one unit f. Summary of Short Run Cost Curves i. Total Cost and Variable Cost curves rise first at a decreasing rate (become flat) and then at an increasing rate (become steeper) ii. The output at which these two curves begin to increase at an increasing rate is known as the

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## This note was uploaded on 04/10/2008 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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SECTION V OUTLINE - I SECTION V THE COMPETITIVE FIRM a...

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