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Block 4.1, Expenses of all inputs (e.g., L and K), Units x price, Total…
Block 4.1
Firm's costs
Total costs
To check
profitability
(is it below revenues?)
Average costs
Gives indication of
cost efficiency
per possible output level
Types
Short-run
Unable to change Q of atleast one production factor
Long-run
Able to change Q of all production factors
Fixed costs
Do not vary with output level
Variable costs
Vary with output level
Marginal cost
Cost of producing an additional unit of output
Diminishing returns
MC rises as output increases
Increasing returns
MC falls as output increases
Market forces
Supply curve
Market supply determinants
Price
Movement
along curve
Prices of inputs
Shift
of entire supply curve
Technological progress
Number and size of firms
Substitutes and goods in joint supply
Unexpected events
Law of supply
Positive relationship
between P and Q
Price elasticity of supply
Responsiveness of supply to a change in P
Demand curve
Law of demand
Negative relationship
between P and Q
Market demand determinants
Price
Movement
along curve
Incomes
Shift
of entire demand curve
P of substitutes
Preferences
Socio-economic factors
Expected future prices
Price elasticity of demand
Inelastic
Between 0 and 1
Elastic
Greater than 1
Utility
Amount of satisfaction
derived from consumption
Marginal utility
Additional utility
gained when consuming an additional unit of a good
Market interaction
Equilibrium
Control of prices
Price floor
Price ceiling
Out of equilibrium
Shortage
Surplus
Economies of scale
When LRAC falls when output increases
Limitations
Minimum efficient scale (MES)
No (further) cost advantages from (increasing) larger scale output
Diseconomies of scale
When LRAC rises when output rises
Expenses of all inputs (e.g., L and K)
Units x price
Total costs / Q of output
e.g., raw materials/labour hours
e.g., new factories
Flat part of LRAC
Upwards part of LRAC
Change in TC / Change in Q of output
Proportionate change in Q demanded / proportionate change in P