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October 22/24 Lecture Notes EC110

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EC 110
Kent Zirlott

Key: Examples Formula Emphasis Definition Notes Test 3- Day One; October 22nd, 2013 1) Total Revenue, Total Cost, Profit a) We assume that the firm’s goal is to maximize profit i) Profit = Total Revenue – Total Cost (1) Total Revenue- the amount a firm receives from the sale of its output (2) Total Cost- the market value of the inputs a firm uses in production 2) Costs: Explicit vs. Implicit a) Explicit Costs- require an outlay of money i) Paying wages to workers b) Implicit Costs- do not require a cash outlay (Not necessarily on the books) i) Opportunity of the owner’s time ii) Remember one of the ten principles (1) The cost of something is what you give up to get it (Opportunity Cost) 3) Economic Profit vs. Accounting Profit a) Accounting Profit = Total Revenue – Total Explicit Costs i) Ignores implicit costs, so it’s higher than economic profit b) Economic Profit = Total Revenue – Total Costs i) Includes explicit and implicit costs c) Examples i) Renting an office space (1) Explicit and Accounting fall $500 a month ii) Owning and office space (1) Explicit costs do not change, accounting does not fall (2) Implicit costs increase $500 a month, so economic falls by $500 a month 4) The Production Function a) Production function- shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good i) Can be represented by a table, equation or graph ii) Examples (1) Farmer jack grows wheat, has 5 acres and can hire unlimited workers Workers Quantity of Output 0 0 1 1000 2 1800 3 2400 5 3000 b) Marginal Product (MPL)- Additional output you get from using an additional input i) Marginal Product of Labor = Change in output / Change in labor Workers Quantity of Output Marginal Product of Labor 0 0 1000 1 1000 800/1= 800 2 1800 600/1= 600 3 2400 400/1= 400 5 3000 200/1= 200 (1) MPL is the slope of the production function (2) MPL diminishes as L increases ii) Why MPL is important: (1) How many workers we should hire iii) Why MPL Diminishes: (1) Jack: The 5 acres is a fixed amount of space (2) If the fixed input is land or capital (building) (3) This is short run (a) Long run, you can buy more land/stores iv) Diminishing Marginal Product- The marginal product of an input declines as the quantity of the input increases (other things equal) 5) Fixed and Variable Costs a) Fixed Costs- Do not vary with the quantity of output produced
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