Economic Profit vs. Accounting Profit
total revenue minus total explicit costs
total revenue minus total costs (including explicit and implicit costs)
Accounting profit ignores implicit costs,
so its higher than econo
Diminishing marginal product:
The marginal product of an input declines as the quantity of the input increases
(other things equal).
Marginal Cost (MC)
is the increase in Total Cost from
producing one more unit:
Why MC Is Important
The Efficiency of a Competitive Market
Profit-maximization: MC = MR
Perfect competition: P = MR
So, in the competitive eqm:
Recall, MC is cost of producing the marginal unit.
P = MC
P is value to buyers of the marginal unit.
So, the competitive eqm is eff
Market Supply: Assumptions
All existing firms and potential entrants have identical costs.
Each firms costs do not change as other firms enter or exit the market.
The number of firms in the market is
fixed in the short run
(due to fixed costs)
Economies of scale occur when increasing production allows greater specialization:
workers are more efficient when focusing on a narrow task.
More common when Q is low.
Diseconomies of scale are due to coordination problems in large organizations.
The LR Market Supply Curve
The LR market supply curve is horizontal if
all firms have identical costs, and
costs do not change as other firms enter or exit the market.
If either of these assumptions is not true,
then LR supply curve slopes upward.
Factors of production: the inputs used to produce goods and services.
Capital: the equipment and structures used
to produce goods and services.
Prices and quantities of these inputs are determined by supply & demand in
Why Do Firms Stay in Business
if Profit = 0?
Recall, economic profit is revenue minus all costs, including implicit costs like the
opportunity cost of the owners time and money.
In the zero-profit equilibrium,
firms earn enough revenue to cover these cos
Shutdown vs. Exit
A short-run decision not to produce anything because of market conditions.
A long-run decision to leave the market.
A key difference:
If shut down in SR, must still pay FC.
If exit in LR, zero costs.
A Firms Short-run Dec
Characteristics of Perfect Competition
Many buyers and many sellers.
The goods offered for sale are largely the same.
Firms can freely enter or exit the market.
The Revenue of a Competitive Firm
Total revenue (TR)
Average revenue (AR)