FC and VC changes
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Why Marginal Cost curve DOES NOT SHIFT when Fixed Costs change and why do BOTH MC and ATC curves shift when there is a change in Variable Costs
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- Firms are price-takers and will shut down production in the short-run if price falls below average variable cost.
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1) In the short run, firms have both fixed and variable costs. Fixed costs do not depend on output while variable costs do. Marginal cost is the change in total cost from producing one more unit of output.
2) As a firm increases output in the short run, marginal costs will initially decrease but eventually rise as it approaches its fixed capacity. Average costs also fall at first but then rise as marginal costs increase.
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A competitive market has many small firms that produce identical goods, with free entry and exit. Each firm is a price taker and maximizes profits by producing where marginal revenue equals marginal cost. The competitive firm's supply curve is its marginal cost curve above average variable cost in the short run and above average total cost in the long run. Market supply is the sum of individual firm supplies. In the long run, entry and exit drive the market to equilibrium with price equal to minimum average total cost and zero profits.
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The document discusses the costs of taxation. It explains that taxes reduce economic efficiency by creating a wedge between the price paid by buyers and received by sellers. This leads to a reduction in quantity traded from the efficient level. The difference between the total benefits and costs without the tax, compared to with the tax, is called the deadweight loss. The size of the deadweight loss depends on how responsive supply and demand are to price changes - the more responsive they are, the greater the efficiency reduction from the tax. While tax revenue increases with moderate tax rates, very high taxes can reduce market size and quantity traded so much that they ultimately lower tax revenues too.
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- A schedule of costs is presented showing output levels and the associated total, average, and marginal costs.
- The relationship between marginal
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•Diminishing marginal returns
•The shapes of cost curves
•The Average–Marginal Relationship
•Costs in a long run
•Cost minimizing input choices
•Isocost lines
•Marginal rate of technical substitution
•Expansion path
•The Inflexibility of Short-Run Production
•Long run average cost
•Economies and Diseconomies of Scale
•The Relationship Between Short-Run and Long-Run Cost
•Break even analysis
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This document discusses the concepts of costs and cost curves. It defines different types of costs including fixed costs, variable costs, total costs, average costs and marginal costs. It explains the typical shapes of total cost, average cost and marginal cost curves. Specifically, it notes that the marginal cost curve rises with output while the average total cost curve is U-shaped, with the marginal cost curve crossing the average cost curve at the minimum point. The document also distinguishes between costs in the short run versus long run.
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This document discusses short-run costs and output decisions for firms. It defines various cost concepts like fixed costs, variable costs, total costs, average costs and marginal costs. It explains that in the short-run, firms face fixed costs that cannot be changed. It also discusses how firms determine the profit-maximizing level of output by producing at the point where marginal revenue equals marginal cost. The marginal cost curve represents a firm's short-run supply curve in perfect competition.
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1) In the short run, firms have both fixed and variable costs. Fixed costs do not depend on output while variable costs do. Marginal cost is the change in total cost from producing one more unit of output.
2) As a firm increases output in the short run, marginal costs will initially decrease but eventually rise as it approaches its fixed capacity. Average costs also fall at first but then rise as marginal costs increase.
3) A profit-maximizing firm will produce the quantity where marginal revenue equals marginal cost, which is also where average total cost is minimized in perfect competition. The marginal cost curve represents the firm's short-run supply curve.
Short-Run Costs and Output Decisions
- In the short run, firms have fixed costs that do not depend on output level. They also have variable costs that vary with output. Total costs are the sum of fixed and variable costs.
- Marginal cost is the change in total cost from producing one additional unit. It reflects changes in variable costs. Marginal cost typically rises as output increases in the short run due to diminishing returns.
- A profit-maximizing firm will produce the quantity where marginal revenue equals marginal cost. In perfect competition, this occurs where price equals marginal cost.
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- In the short run, firms have fixed costs that do not depend on output level. They also have variable costs that vary with output. Total costs are the sum of fixed and variable costs.
- Marginal cost is the change in total cost from producing one additional unit. It reflects changes in variable costs. Marginal cost typically rises as output increases in the short run due to diminishing returns.
- A profit-maximizing firm will produce the quantity where marginal revenue equals marginal cost. In perfect competition, this occurs where price equals marginal cost.
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- The market price for milk also increased due to higher demand from cheese makers and exporters. This shifted the demand curve facing the farmer upward.
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Cost theory and analysis.pptx
Here are the steps to solve this example:
1. Estimate the total cost function:
TC = a + bQ + cQ^2
2. Take the first derivative of the total cost function to get the average cost function:
AC = b + 2cQ
3. Take the first derivative of the average cost function and set equal to 0 to minimize AC:
b + 2cQ = 0
Q = -b/2c
4. Plug back into the average cost function to get the minimum AC.
5. Compare minimum AC to market price to determine if production should continue.
In this example, the estimated total cost function is:
TC = 700
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This chapter discusses the costs of production for a firm. It explains the differences between fixed and variable costs, as well as how average and marginal costs are determined. In the short run, costs are influenced by increasing or decreasing returns. In the long run, the user cost of capital must be considered. Cost curves, including total, average, and marginal costs are presented to show how costs change with different levels of output.
Ppt econ 9e_one_click_ch08
This document discusses short-run costs for firms. It defines key cost concepts like fixed costs, variable costs, total costs, average costs, and marginal costs. Fixed costs do not vary with output, while variable costs do. Total costs are the sum of fixed and variable costs. Marginal cost is the change in total cost from producing one additional unit. In the short-run, marginal costs typically rise as fixed capacities are approached. The document provides graphs and examples to illustrate how these different cost curves relate to each other.
Microeconomics cost numerical.pptx
The document describes costs for three firms over different quantities of output.
Firm A experiences economies of scale as its long-run average cost continuously declines as output increases. Economies of scale occur when output increases by a greater proportion than inputs, so that average costs fall with scale.
Diseconomies of scale happen when output rises less than inputs, causing average costs to increase with scale. Firm A is the only one that sees LRAC decline throughout, indicating it benefits from economies of scale.
Chapter 10 monopoly and monopsony
This document discusses monopoly and monopoly power. It begins by reviewing perfect competition and then defines monopoly as a market with one seller and many buyers of a unique product where there are barriers to entry. A monopolist maximizes profits by producing where marginal revenue equals marginal cost. The document provides examples of how a monopolist determines output and price. It also discusses how a monopolist may respond to shifts in demand and the effects of taxes. The document notes that multi-plant firms will equalize marginal costs across plants. While true monopoly is rare, oligopolistic markets can exhibit monopoly power if firms have downward sloping demand curves. The Lerner Index is introduced as a way to measure monopoly power.
Cost
This document defines key cost concepts including total fixed cost (TFC), total variable cost (TVC), total cost (TC), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC or AC), and marginal cost (MC). It explains that TFC remains fixed regardless of output while TVC varies with output. TC is the sum of TFC and TVC. AFC, AVC, and AC represent per-unit costs. AC curves typically have a U-shape, as does the MC curve, which cuts the AC curve at its minimum point. Formulas are provided relating these different cost concepts.
Cost theory
The document discusses cost theory concepts including opportunity costs, explicit and implicit costs, short-run and long-run costs, fixed and variable costs, total cost, average cost, and marginal cost. It explains how average, marginal, and total costs are related and how their curves are shaped. Specifically, it summarizes that marginal cost and short-run average cost curves slope upward due to diminishing returns, while the long-run average cost curve is U-shaped as economies of scale initially lower costs but diseconomies later raise them. The envelope relationship shows that short-run average costs are always above the minimum long-run average cost.
Chap4
1. The document discusses the production process of firms, including the concepts of production, costs, profits, and the production decision process.
2. It explains the differences between accounting costs, economic costs, explicit costs, and implicit costs. Accounting profits consider explicit costs only, while economic profits consider both explicit and implicit costs.
3. The production process involves using inputs like labor, capital, and raw materials through a production function to transform these inputs into outputs according to the technology used. The levels of inputs can be varied in the long run but not the short run.
Similar to FC and VC changes (20)
More from Gene Hayward
Utility maximization
- Economists measure utility or satisfaction derived from consuming goods and services. Utility is maximized when marginal utility per dollar spent is highest.
- Using a hot dog and hamburger example, the document defines total utility, marginal utility, and marginal utility per dollar spent.
- With $10 to spend, the optimal purchase maximizes utility by first buying hamburgers, which have a higher marginal utility per dollar, until spending is maximized.
Elasticity of Demand and Supply (longer edition)
Elasticity measures the responsiveness of consumers or producers to changes in price. It is calculated as the percentage change in quantity divided by the percentage change in price. Demand is elastic if this value is greater than 1, inelastic if less than 1, and unit elastic if equal to 1. There are several factors that determine the elasticity of demand such as availability of substitutes, proportion of income spent, and whether the good is a necessity or luxury. Elasticity can be calculated between two points on a demand curve using the midpoint formula. The total revenue test also helps determine elasticity based on whether total revenue increases or decreases with a price change.
Elasticity
The document discusses the concept of elasticity of demand. It defines elasticity of demand as the percentage change in quantity demanded divided by the percentage change in price. An elastic demand means this ratio is greater than 1, an inelastic demand means the ratio is less than 1, and a unit elastic demand means the ratio equals 1. The document then discusses how the slope of a demand curve relates to its elasticity, with flatter curves being more elastic and steeper curves being less elastic. It also introduces the total revenue test for elasticity and other types of elasticity like cross-price and income elasticity.
Balance of Payments
The document discusses the US balance of payments, which accounts for all transactions between US residents and residents of other countries. It includes exports and imports of goods and services, as well as investment income and capital flows. The balance of payments has two main components - the current account, which covers trade and investment income, and the capital account, which covers capital transactions. The document provides examples and dollar amounts for various items in the US 2008 balance of payments, including exports, imports, investment income payments and receipts, and unilateral transfers. It notes that the current account and capital account must always balance in the end.
Market for Loanable Funds
The document discusses the market for loanable funds and how government deficit spending can impact interest rates in this market. It begins by explaining that the market for loanable funds represents the financial system where those with surplus funds (the supply of loanable funds) lend to those who want to borrow funds (the demand for loanable funds). The equilibrium real interest rate is established where the supply and demand for loanable funds are equal. The document then states that if the government engages in deficit spending and borrows in the market for loanable funds, it increases the demand for funds and puts upward pressure on interest rates. This causes private borrowing by consumers and businesses to decrease, known as the "crowding out effect." The extent of
Supply and Demand Together. Shift of Demand Curve
This document discusses how supply and demand interact in a market when demand increases or decreases. When demand increases, the demand curve shifts to the right, creating a shortage at the original price. The price rises until quantity demanded and supplied are equal again, eliminating the shortage. When demand decreases, the demand curve shifts left, creating a surplus. The price falls until quantity demanded again equals quantity supplied. In both cases, the invisible hand of the market works through price adjustments to clear the market.
PPF Constant and Increasing Opportunity Costs
The document discusses the benefits of exercise for mental health. Regular physical activity can help reduce anxiety and depression and improve mood and cognitive functioning. Exercise causes chemical changes in the brain that may help protect against mental illness and improve symptoms.
Foreign exchange market
The document provides information about the foreign exchange market (FOREX). It explains that currencies are traded between countries and factors like preferences, quality, prices, incomes, and interest rates can impact currency exchange rates. The FOREX is represented worldwide and currencies are subjected to supply and demand. When factors change, it can cause one currency to appreciate or depreciate relative to another currency, impacting exports and imports between the two countries.
Normal vs Economic Profits
This document discusses the difference between normal profits and economic profits from an economist's perspective. Normal profits account for both explicit costs like wages and utilities as well as implicit opportunity costs of forgone earnings. Economic profits are any profits above normal profits. The example shows that while accounting profits were $57,000, when implicit opportunity costs of $28,000 are considered, economic profits were $29,000, indicating the business owner was allocating resources efficiently. Positive economic profits signal other entrepreneurs may enter the market, while negative economic profits signal entrepreneurs may exit the industry.
Factor market: Labor
The document discusses labor markets under conditions of perfect competition for goods and labor. It analyzes how a firm's demand for labor (derived demand) is determined by the marginal revenue product of labor curve. This curve can shift due to changes in productivity or price of the good produced. An increase in either factor causes the curve to shift right and increases labor demand. The firm hires workers up to the point where the wage rate equals marginal revenue product. The document also examines how the firm responds to changes in the market wage rate, hiring more workers if wages decrease and fewer workers if they increase.
Keynesian Multiplier Effect Illustrated.
The document discusses the Keynesian multiplier effect, which posits that a change in spending or taxes can have a multiplied impact on GDP. It provides examples to illustrate how:
1) An initial $1 spent can increase GDP by $2 through subsequent rounds of spending as each dollar is spent and re-spent, with each person tending to save a portion.
2) A government spending increase of $10 billion can boost GDP by $100 billion, according to the government spending multiplier formula of 1/MPS.
3) A tax cut of $10 billion can increase GDP by $90 billion, according to the tax cut multiplier formula of -MPC/MPS, which has a smaller impact
"OOO" Method to calculate Comparative Advantage
The document outlines the opportunity costs of corn and wheat production in the US and Brazil. It shows that in the US, the opportunity cost of 1 bushel of corn is 2 bushels of wheat, while the opportunity cost of 1 bushel of wheat is 1/2 bushel of corn. In Brazil, the opportunity cost of 1 bushel of corn is 3 bushels of wheat, while the opportunity cost of 1 bushel of wheat is 1/3 bushel of corn. This information can be used to determine which country has a comparative advantage and will likely specialize in and export each good.
Comparative Advantage: "IOU" method
The document compares corn and wheat production in the US and Brazil. It shows that in the US, 1 acre of corn has an opportunity cost of 0.5 acres of wheat, while 1 acre of wheat has an opportunity cost of 2 acres of corn. In Brazil, 1 acre of corn has an opportunity cost of 0.33 acres of wheat, while 1 acre of wheat has an opportunity cost of 3 acres of corn. This indicates that Brazil has a comparative advantage in and likely specializes in corn production and exports corn, while importing wheat.
Absolute and comparative advantage
The document discusses the concepts of absolute and comparative advantage between two hypothetical countries, Country A and Country B, that produce only two goods: cloth and wine. It shows that while Country B has an absolute advantage in producing both goods, it has a comparative advantage in cloth while Country A has a comparative advantage in wine due to their opportunity costs of production. This allows for gains from specialization and trade where Country B specializes in cloth and Country A in wine. An acceptable terms of trade is determined between the countries' opportunity costs that makes both better off through trade.
Market for butter
The document discusses how a shift in the supply curve of butter from Supply* to Supply1, representing an increase in the cost of a vital input. This causes the market for butter to move from an initial equilibrium at point A, with price Pe and quantity Qe, to a new equilibrium. With the higher costs, the supply curve shifts leftward to Supply1. The market attempts to price butter at the initial price P1, but this creates a surplus as the quantity supplied at B exceeds the quantity demanded at E. Economic theory suggests the price will decrease to clear the market, moving along the demand and supply curves until a new equilibrium is reached at point C, with a higher price P2 and quantity Q1.
Meat product social cost**
The document discusses the market for meat products and how the private costs of production and private benefits of consumption do not account for external environmental costs. It suggests the socially optimal level of meat production is below the current market equilibrium level. To better align supply and demand with social costs and benefits, a tax could be imposed on producers to internalize environmental costs by shifting the supply curve leftward, resulting in a lower equilibrium quantity and price that covers true societal costs. This tax captures the deadweight loss from current production exceeding marginal social benefits.
Supply inc dec 2003
The document describes how a 50% decrease in supply from the original equilibrium would impact the market. With the supply curve shifting left to Supply 1, at the original price of $1 there is now a shortage as quantity demanded exceeds quantity supplied. This disequilibrium will cause price to rise until it reaches a new equilibrium where quantity demanded equals quantity supplied along the new supply curve.
Absolute and comparative advantage
The document discusses production possibilities frontiers and comparative advantage in international trade. It explains that a production possibilities frontier (PPF) shows the maximum quantities of two goods an economy can produce given limited resources, and that different shaped PPFs indicate different opportunity costs of production. The document then uses an example of two countries, A and B, to illustrate how both can benefit from specializing in and trading the good each has a comparative advantage in, even if one country has an absolute advantage in both goods. Through determining acceptable terms of trade based on each country's opportunity costs, both countries can consume beyond their PPFs.
Monopoly
A document outlines key concepts regarding monopoly, including:
1) A monopoly is characterized by a single seller in the market with no close substitutes who acts as a price maker and can block entry of new competitors.
2) A monopoly faces a downward sloping demand curve and can only increase sales by lowering price across all units sold. As a result, marginal revenue is always below price.
3) A profit-maximizing monopoly will produce at the quantity where marginal revenue equals marginal cost and charge the price dictated by the demand curve at that quantity of output.
Absolute and Comparative Advantage
The document discusses absolute and comparative advantage between two countries, A and B, that produce cloth and wine. Country A can produce more wine but less cloth than Country B. Country B can produce more cloth but the same amount of wine as Country A. It is determined that Country B has a comparative advantage in cloth production since it has a lower opportunity cost than Country A. Country A has a comparative advantage in wine production as it has a lower opportunity cost than Country B. Therefore, both countries would benefit from specializing in what they have a comparative advantage in and trading - Country B should focus on cloth while Country A focuses on wine.
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FC and VC changes
- 1. Using this Cost data we first want to see how changes to Fixed Costs AND Variable Cost will affect the ATC and the MC curves
- 2. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM We will look at this in terms of the Firm that operates in a “Perfectly Competitive” Market. The firm is a Price Taker (“P=MR=AR=D*). The price will stay constant in this example. “A”
- 3. Assume Fixed Costs INCREASE by $100. The most commonly asked question on the AP Micro test is for a change in “Lump Sum Taxes”. This is considered a Fixed Cost as it is spread out over ALL units produced. IMPORTANT NOTE: Fixed Costs INCREASE. Total Costs INCREASE, ATC INCREASE…BUT…Marginal Costs ARE NOT AFFECTED!! Read that again…
- 5. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 NOTE: The Profit Maximizing Quantity STAYS THE SAME even though the ATC has shifted up. Profit Maximizing Rule: (or Loss Minimizing) MR =MC still holds at that is at Qf* “A”
- 6. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 Since the ATC curve has shifted UP , the Average Total Cost of producing “Qf*” units of this good is “ATC 1” This is MORE than the firm is receiving for each unit. The Firm is incurring ECONOMIC LOSSES ATC 1 “A” “B”
- 7. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 Since the ATC curve has shifted UP , the Average Total Cost of producing “Qf*” units of this good is “ATC 1” This is MORE than the firm is receiving for each unit. The Firm is incurring ECONOMIC LOSSES ATC 1 Area of Economic Loss “A” “B”
- 8. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM A “Lump Sum SUBSIDY” would work in the opposite way. It would DECREASE Fixed Costs and the ATC* curve would shift DOWN, indicating a DECREASE in ATC (ATC 1) The firm is now making ECONOMIC PROFIT (ATC 1 is LESS than the price the firm is receiving) Toggle back and forth between this slide and the last to see the difference in the two situations. ATC 1 ATC 1 Area of Economic PROFIT “A” “B”
- 9. How a change in MARGINAL COST affects the cost curves. A change in Marginal Costs will affect BOTH the Marginal Cost curve And the Total Cost curve. The most commonly asked question, in regards to cost curves, on the AP Micro Test is how a change in “Per Unit Taxes or Subsidies” affect the Cost Curves.
- 10. Output (Q) Total Fixed Cost (TFC) Total Variable Cost (AVC Total Cost (TC) Marginal Cost (MC) Average Total Cost (ATC) 1 $100 $50 $150 ---- $150 2 $100 $80 +$2=$82 $180 ($182) $30 ($32) $90 ($91) 3 $100 $100 +$3=$103 $200 ($203) $20 ($21) $66.66 ($67.66) 4 $100 $110+$4=$114 $210 ($214) $10 ($11) $52.50 ($53.50) 5 $100 $150=$155 $250 ($255) $40 ($41) $50 ($51) 6 $100 $220=$226 $320 ($326) $70 ($71) $53.33 ($54.33) 7 $100 $350=$357 $450 ($457) $130 ($131) $64.29 ($65.29) Using the same data, we now look at how a “Per Unit Tax” will affect the Cost curves. A Per Unit Tax affects the cost of each additional unit produced. IT IS A VARIABLE COST Assume $1.00 is the PER UNIT TAX. The MC of producing EACH UNIT Is now GREATER at each level of production ATC is GREATER at each level of production
- 11. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 Average Total Costs (ATC) INCREASE. ATC curve shifts UP (“ATC 1”) “A”
- 12. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 Marginal Costs INCREASE. Marginal Cost curve shifts UP (to the LEFT to “MC 1”). MC 1 “B” “A”
- 13. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 MC 1 “B” “A” Find the NEW Profit Maximizing Quantity. MR = MC Point “B”
- 14. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 MC 1 “B” “A” Qf 1 Find the NEW Profit Maximizing Quantity. MR = MC Point “B” Because the MC curve Shifted we will have a new Profit Maximizing Quantity !!
- 15. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 Because the Average Total Cost (“ATC 1”) is GREATER than the Price the firm is experiencing “Economic Losses” MC 1 “B” “A” Qf 1 “C” ATC 1
- 16. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 Because the Average Total Cost (“ATC 1”) is GREATER than the Price the firm is experiencing “Economic Losses” MC 1 “B” “A” Qf 1 “C” ATC 1 Area of Economic Losses
- 17. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing. “A”
- 18. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing. “A”
- 19. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing. MC 1 “A” Qf 1
- 20. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing. MC 1 “B”“A” Qf 1 “C”ATC 1
- 21. Price Quantity P=MR=AR =D* ATC* MC* Qf* FIRM ATC 1 A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing. MC 1 “B”“A” Qf 1 “C”ATC 1 Area of Economic Profit