Micro Final Notes

Production (9)

The long run for a particular production process = shortest period of time required to alter the amounts of every input. In the long run, all inputs are variable. Short run = period during which one or more inputs cannot be varied.

Law of diminishing returns: a short run phenomenon which means - if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline.

Figure 9.4 (a short run production function - (technical improvements, for example, can cause upward shift in prod function))

Total product curves: Relate the total amount of output to the quantity of the variable input.

Marginal product: The change in the total product that occurs in response to a unit change in the variable input (all other inputs held fixed). For example, MPL=∆Q/∆L.

Average product: The total product (output) divided by the quantity of the variable input (APL=Q/L)

Figure 9.7 (MPL & APL) - As long as labor commands a positive wage, a manager would never employ the variable input in the region where its marginal product of labor is negative. Also, he would never employ a variable input past the point where the total product curves reaches its maximum value (where MPl=0)...When the MP curve lies above the AP curve, the AP curve must be rising; and when the MP curve lies below the AP curve, the AP curve must be falling. The two curves intersect at the max value of the AP curve.

Rule for allocating an input efficiently: Allocate each unit of input to the production activity where its MP is highest.

Isoquant: The set of all input combinations that yield a given level of output.

MRTS: The rate at which one input can be exchanged for another w/out altering the total level of output (MRTSpoint A = ∆K/∆L).

RS:what happens to output when all inputs are increased by exactly the same proportions. B/c RS refer to situation which all inputs are variable, the concept is a LR concept.

IRS: A prod function for which any given proportional change in all inputs leads to a more than proportional change in output. Large industries size is an advantage.

CRS: A proportional change in all inputs causes output to change by same proportion. Large industry size and small industry size is neither an advantage nor a disadvantage.

DRS: A proportional change in all inputs causes a less than prop change in output. Here, large industry size is a handicap. We don't expect to see large firms in an industry in which production takes place with DRS.

Decreasing Returns to Scale have nothing to do w/ the law of diminishing returns. DRS refers to what happens when all inputs are varied by some proportion. The law of diminishing returns refers to the case in which one input varies while all others are held fixed.

Figure 9.11 (Returns to Scale)

Costs (10)

QL: 1, 2, 3...

Qoutput:given

(Q = 3*KL = 3(ko)L ; L = Q/3ko)

FC = rko

VC = wL

TC = FC + VC = rKo + wL

AFC = FC/Q = rKo/Q

AVC = VC/Q = wL/Q

ATC = AFC + AVC = (rKo + wL)/Q

MC = ∆TC/∆Q = ∆VC/∆Q

Figure 10.5 (all curves)

MC=w/MP

AVC=w/AP

-The min value of MC corresponds to the max value of MP. The min value of AVC corresponds to the max value of AP.

Figure 10.9 (relationship between MP, AP, MC, and AVC)

LMC=∆LTC/∆Q (LMC is the cost to the firm in the long run of expanding its output by 1 unit)

LAC=LTC/Q

Figure 10.16 (LTC, LAC, and LMC curves)

Figure 10.17 (LTC, LMC, LAC w/ CRS); Figure 10.18 (DRS); Figure 10.19 (IRS)

Figure 10.21 (LAC and industry structures)

If Qo, the min point in panel a, constitutes only a small fraction of total industry output, we expect to see an industry populated by many firms, each which produces only a small percent of total industry output. In panel b, all firms large or small, have the same unit costs of production. For panel c, small size is not only compatible w/ survival in the market but required, since large firms will always have higher AC than smaller ones.

Figure 10.22

To the left of the ATC-LAC tangency, the firm has too much capital, with the result that its FC are higher than necessary. To the right of the tangency, firm has too little capital, so that diminishing returns to labor drive its costs up. Only at the tangency point does the firm have the optimal quantities of both labor and capital for producing the corresponding level of output.

Perfect Competition (11)

Economic profit: TR-TC, where TC includes all costs, both explicit and implicit, associated with resources used by the firm.

4 conditions that define a perfectly competitive mark (firm should produce an output level where SMC=P):

-Firms sell a standardized