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ECON 101 NOTES: Firm Behavior and Market Power

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Alexander Gainer

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FIRM BEHAVIOR AND MARKET POWER INTRODUCTION There are two types of cots in the market: explicit costs and implicit costs. These two types of costs determine the types of profits: accounting profit and economic profit. - Explicit costs – require firms to pay money - Implicit costs – can be things like opportunity costs - Accounting profit = Total revenue – total explicit costs - Economic profit = Total revenue – total costs (explicit + implicit) - Fixed costs – doesn’t vary with quantity of output - Variable costs – varies with quantity The production function can be used to determine many things such as the marginal product of labor and marginal cost. The marginal product of labor shows how much extra/less one will get for hiring another worker, this helps determine a company’s decision to hire more workers. The marginal cost shows how much more/less one will get for producing one more unit. - MPL = slope of the production function - MPL = ∆Q / ∆L - MC = ∆TC / ∆Q In this chapter, people use words like average variable costs or average total costs. However it a new term you have to learn just take the normal variable or total cost and divide them by quantity, and then you’ll get the average. Ex. Variable cost / quantity = average variable cost | or | total cost / quantity = average total cost - Average fixed cost always falls as quantity increases - Average variable costs always “U” shaped - Average total cost is always “U” shaped and is intersected by marginal cost at ATC’s lowest point - Short run: Some inputs are fixed & the costs of these inputs are fixed costs
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