ECON1101 Lecture Notes - Lecture 8: Marginal Cost, Economic Equilibrium, Fixed Cost
Wednesday, 15 March 2017
Microeconomics
Perfectly Competitive Markets
-Market: (for a good or service) set of all the consumers & suppliers who are willing to
buy & sell that good or service at a given price
-Market Equilibrium: Occurs when price & quantity sold of a given good is stable
•When equilibrium price is such that the quantity consumers want today is the same
quantity that suppliers want to sell
•Characteristics: Consumer & suppliers are price-takers, homogeneous goods, no
externality, goods are excludable & rival, free entry & exit, full information
-Marginal Benefit: Extra benefit accrued by producing a certain unit of a given good
-Marginal Cost: Extra cost of producing a certain unit of a given good
•Relevant cost is opportunity cost, not absolute cost
-Cost-Benefit Principle: An action should be taken if marginal benefit is greater than
marginal cost
-Economic Surplus: Difference between marginal benefit & marginal cost of taking a
certain action
-Quantity Supplied: Represents quantity of a given good or service that maximises the
profit of the supplier
-Supply Curve: Represents relationship between the price of a good or service & the
quantity supplied of that good or service
-Law of Supply: Tendency for a producer to offer more of a certain good or service
when the price of that good or service increases
•Producer Reservation Price - minimum amount of money producer is willing to
accept to supply a marginal unit of a certain good
-Sunk Cost - cost that once paid cannot be recovered
-If a factor of production is fixed, its cost does not vary with quantity produced
•Fixed cost - cost associated with a fixed factor of production
-If a factor of production is variable, its cost tends to vary with quantity produced
•Variable cost - cost associated with a variable factor of production
-Total Cost = Variable + Fixed Cost
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Wednesday, 15 March 2017
-Average Costs:
•Average variable cost = Variable cost / quantity
•Average total cost = Total cost / quantity
-Marginal Cost = ∆ Total Cost / ∆ in quantity
-Short Run: Period of time during which at least one factor of production is fixed
-Long Run: Period of time during which all factors of production are variable
-Profit: Difference between total revenues (TR) & total costs (TC)
-Shut Down Condition (Short Run): Entrepreneur should shut down production if
ProfitPRODUCTION < (Fixed Cost)
-Shut Down (Long Run): Entrepreneur should exit industry if Profit PRODUCTION < 0
-Factors that shift supply out:
•Advancements in technology
•Decreased price of variable inputs
•Expectations (on future prices/ demand increases)
•Drop in price/ demand of other products
•Increase in number of suppliers
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Document Summary
Market: (for a good or service) set of all the consumers & suppliers who are willing to buy & sell that good or service at a given price. Marginal bene t: extra bene t accrued by producing a certain unit of a given good. Marginal cost: extra cost of producing a certain unit of a given good: relevant cost is opportunity cost, not absolute cost. Economic surplus: difference between marginal bene t & marginal cost of taking a certain action. Quantity supplied: represents quantity of a given good or service that maximises the pro t of the supplier. Supply curve: represents relationship between the price of a good or service & the quantity supplied of that good or service. Sunk cost - cost that once paid cannot be recovered. If a factor of production is xed, its cost does not vary with quantity produced: fixed cost - cost associated with a xed factor of production.
