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Chapter 13 Mankiw -- industrial organization (how firms make decisions)…
Chapter 13 Mankiw -- industrial organization (how firms make decisions)
What are costs
Total revenue
-- amount firm recieves for sale of cookies
total cost
-- amount firm pays for supplies etc. -- includes explicit and implicit when analyzing decisions
explicit costs
-- cost payed for with literal money
implicit costs
-- costs are not payed for with literal money
Includes cost of owning capital like how much bought factory for
profit
-- total revenue - total cost
economic profit
-- total revenue - total cost including implicit and explicit (usually less than accounting profit)
Firm stays in business if making economic profit
accounting profit
-- total revenue -explicit cost
Production and Costs
production function
-- two column chart/ graph of number of workers on x axis and total output/time on the y axis
marginal product
-- additional output produced per additional input
law of diminishing marginal product
-- each additional input is less productive than the last
total cost curve
-- total cost on y axis and total output on x axis
this curve will get steeper because of law of diminishing marginal product
The Various Measures of Cost
fixed costs
-- costs that do not vary with quantity of output produced
variable costs
-- costs that vary with the quantity of output produced
sum of variable and fixed costs = total costs
average total cost
-- total cost/quantity produced
always more than average variable and average fixed. -- U-Shaped because average fixed is u-shaped and average variable is straight
efficient scale
-- quantity of output that minimizes average total cost
this is true when marginal cost curve intersects the average total cost curve
Can't run if this point is below average variable cost -- break even at AVC=MC=MR
Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising.
average fixed cost
-- fixed cost/quantity produced
average variable cost
-- variable cost/ quantity produced
marginal cost
-- increase in cost per additional unit produced
SHOULDN'T THIS BE A CONCAVE UP GRAPH????
This curve usually goes down before it goes up
Costs in the Short and Long Run
sometimes label fixed or variable changes over time
economies of scale
-- property that on average, as production increases average total costs go down
usually happens because more output allows specialization
diseconomies of scale
-- property that on average, as production increases average total costs go up
usually happens because as company gets larger, it is harder to run logistically
constant returns to scale
-- property that average total cost stays the same as quantity produced changes