Podcast
Questions and Answers
What does AvTC depend on?
What does AvTC depend on?
starting amount of TOTAL FIXED COST
What does the U-shape of the long-run average cost curve generally indicate?
What does the U-shape of the long-run average cost curve generally indicate?
The profit maximization formula is Π = (pq) – (cq) where Π represents ________.
The profit maximization formula is Π = (pq) – (cq) where Π represents ________.
profit
What does the 'elasticity of demand' measure?
What does the 'elasticity of demand' measure?
Signup and view all the answers
What is a normal good?
What is a normal good?
Signup and view all the answers
What is the main objective of a firm according to the Neo-Classical Firm Theory?
What is the main objective of a firm according to the Neo-Classical Firm Theory?
Signup and view all the answers
In the short run, the quantity of fixed factors of production can vary.
In the short run, the quantity of fixed factors of production can vary.
Signup and view all the answers
The relationship between income and demand for goods is captured by the ______ curve.
The relationship between income and demand for goods is captured by the ______ curve.
Signup and view all the answers
Study Notes
Conceptual Building Blocks: Market, Demand, Supply
-
Demand and Supply Functions:
- Demand function: represents the quantity of a good that consumers are willing to buy at a given price level (ceteris paribus).
- Supply function: represents the quantity of a good that firms are willing to sell at a given price level (ceteris paribus).
-
Aggregate Demand and Supply Curves:
- Represent the relationship between the price level and the quantity of a good demanded or supplied.
- Shifts in the curves occur when there are changes in factors other than the price level.
- Elasticity of Demand: measures how responsive the quantity demanded is to changes in the price level or other factors.
- Market Equilibrium: occurs when the quantity demanded equals the quantity supplied at a given price level.
The Aggregate Demand and Supply Curve
-
Excess Demand or Supply: occurs when the quantity demanded is not equal to the quantity supplied at a given price level.
- Excess demand: quantity demanded exceeds quantity supplied.
- Excess supply: quantity supplied exceeds quantity demanded.
Shifts in the Demand and Supply Curves
-
Changes in Factors:
- Changes in income, prices of related goods, tastes, and expectations can shift the demand curve.
- Changes in production costs, technology, and expectations can shift the supply curve.
-
Normal and Inferior Goods:
- Normal goods: demand increases with increasing income.
- Inferior goods: demand decreases with increasing income.
The Neo-Classical Firm Theory
-
Key Assumptions:
- Firms produce using technology to transform inputs into outputs.
- Firm as a "black box" with no influence by context or internal dynamics.
- The owner of the firm is also its manager, with no separation of roles.
- All benefits and burdens of business activity are fully expressed by revenues and costs.
- The sole objective of the firm is to maximize profit.
-
Profit Maximization:
- Profit (π) = Total Revenue (TR) - Total Cost (TC).
- The firm aims to maximize profit by minimizing total costs.
The Production Function
-
Step 1: Identify the Relationship between Output and Inputs:
- Output (q) = f(L, K), where L is labor and K is capital.
- Simplifying: q = f(L, K).
-
Step 2: Identify the Optimal Quantity to Produce:
- Minimize total costs by using the optimal combination of inputs.
The Short Run and Long Run
-
Short Run:
- A time interval during which the quantity of certain inputs (fixed factors) cannot vary.
- Labor is the most easily variable factor in the short run.
-
Long Run:
- A time interval during which both inputs can vary (but not technology).
- The firm plans market entry, expansion, or contraction of its operations.
The Short Run
-
Production Function:
- Total product (TP): quantity produced during a certain time interval using all inputs.
- Average product (AP): TP/L, the quantity of product produced on average by each unit of labor employed.
- Marginal product (MP): ΔTP/ΔL, the change in total product corresponding to the use of an additional unit of the variable input.
-
Law of Diminishing Returns:
- Given a certain fixed amount of capital, if the firm uses increasing amounts of labor, there will be a point from which the average product and the marginal product will begin to decline.
-
Total Cost:
- Total fixed cost (TFC): the cost incurred to produce a given quantity of product in a given unit of time, constant in the short run.
- Total variable cost (TVC): the cost incurred to produce a given quantity of product in a given unit of time, increasing in the short run.
The Long Run
-
Optimal Amount of L and K:
- The optimal amount of labor and capital is determined by the ratio of their marginal productivities.
- The firm aims to minimize the long-run average cost.
-
Long Run Average Cost Curve:
- Indicates the lowest unit costs at which each level of output can be produced.
- The U-shape of the curve is related to the returns to scale.
-
Returns to Scale:
- Increase in the initial part of the curve, leading to a decrease in unit costs as the volume of production increases.
- Decrease in the final part, due to an increase in average costs.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
A quiz on the fundamental concepts of microeconomics, covering demand and supply functions, aggregate demand and supply curves, and their economic meaning.
