marginal utility per dollar than the other. Then we could move $1 from buying the lesser utility good to the more utilized good. The new bundle is still just affordable even after shift. Then utility increases. Contradiction because old bundle is just affordable but does not have greatest utility Suppose the situation is the other way around. Repeat argument. Conclude that marginal utility per dollar equals across goods. SHORT RUN & LONG RUN DEMAND Short run – time when at least on dependent variable is fixed or cannot be changed Long run – no fixed dependent variables PRODUCER THEORY Firm – anything that transforms resources into outputs Technology (TR) Total Revenue – value of output sold TR = P (Market Price) x Q (Quantity sold, in unit
ECON 101 MIDTERM 2 NOTES CASSEY Profit, Π = TR – TC Firm = production function (long-run concept) Output Y = f(K,L,T, … .) y = f(x) o f = technology o K = capital o L = labor o T = land o … = other resources TPF has K (capital) and T (land) fixed, while L (labor) is a dependent variable that can be chosen (MP) Marginal Product – additional amount of total product (Q) from hiring one more unit of resources MP L = marginal product of labor, Δ Q/ Δ L MP K = marginal product of capital Law of Diminishing Marginal Product (Returns) – amount of additional output from hiring one more unit of resource, but eventually decreases This is a short run fact Always upward sloping, eventually becomes flatter OPPORTUNITY COSTS OF FIRM Opportunity Cost – value of next best alternative; cost of forgone actions TC is opportunity cost Sunk Cost – past cost that cannot be recovered from any action today Assumption – firms ignore sunk costs REVENUE Π = TR – TC f irm constrained by the fact that demand facing firm is given TR = P x Q P market price which is independent for competitive firms. Given to firms. Q firms choose quantity (TR) Total revenue = value of output sold, measured in $, not in money (MR) Marginal Revenue – additional revenue from producing & selling one more unity of quantity MR = Δ TR/ Δ Q slope of TR = Market Price **Demand facing any individual firm is not the same as Market Demand** COSTS Costs in economics are always opportunity costs Measured in value, not money Different from accounting cost Π = TR – TC firms constrained by costs of production (TC) Total Cost – value of resources used in production TC = Fixed Cost (FC) + Variable Cost (VC) Fixed cost is cost that is not sunk but does not depend on Q because it ’s
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