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Unit 3: Production and the Perfect Competition Model, Two time horizons…
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The Graph
Properties of the graph
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If MC is below ATC, then ATC is falling (negative slope)
If MC is below AVC, then AVC is falling (negative slope)
If MC is above ATC, then ATC is rising (positive slope)
If MC is above ATC, then ATC is rising (positive slope)
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ATC - AVC = AFC
So as ATC and AVC get closer together, AFC will get smaller and smaller
Measuring production
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Marginal product (MP): the additional output produced by one more unit of a variable input, often labor. MP = Change in total product / change in labor
Average Product (AP): the average quantity of output produced by one unit of a variable input, often labor. AP = total product / labor
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Long run production
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if a firm doubles its inputs, only 3 possible things could happen to its outputs
More than double, double, less than double
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Two Types of Profit
Profit provides incentive for firms to innovate, cut costs and generally engage in behavior that uses society's resources efficiently
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Costs
Explicit Costs
include typical business expenses (land, labor and capital)
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Allocative efficiency
The firm is producing the amount society wants, where the price (MR) equals the marginal cost
Productive efficiency
The firm is producing at the lowest possible cost, where the ATC is minimized
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