Transcript Economics, by R. Glenn Hubbard and Anthony Patrick O'Brien

Principles of MicroEconomics:
Econ102
does not refer to a specific period of time, but rather
are general or broad periods of time that coexist!!
Short-Run:
The period of time during which at least one of the
firm’s inputs is fixed.
Long-Run:
A period of time long enough to allow a firm to vary
all of its inputs, to adopt new technology, and to
increase or decrease the size of its physical plant.
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Total Accounting Costs = Explicit costs only
Versus
Total Economic Costs = Explicit + Implicit costs
Where………
Explicit Costs:
Those paid to factors of production owned by people
outside of the business (tangible, monetary costs)
Implicit Costs:
Represent the opportunity costs of the owner(s),
primarily intangible costs…..sacrifices….what is given up
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Economic Profit:
Total revenue (TR) minus total economic costs (TEC)
Versus
Accounting Profit:
Total revenue (TR) minus total accounting costs (TAC)
Where…….
Total Revenue = Price multiplied by quantity/output
(PxQ)
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Fixed costs:
Costs that remain constant (don’t change) as output
changes.
Variable costs:
Costs that change as output changes.
Total cost: The cost of all the inputs a firm uses in
production.
Total Cost = Fixed Cost + Variable Cost
TC = FC + VC
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Average Fixed Costs (AFC):
Fixed costs divided by the quantity of output produced:
AFC = FC/Q
Average Variable Costs (AVC):
Variable costs divided by the quantity of output produced:
AVC = VC/Q
Average Total Costs (ATC):
Total costs divided by the quantity of output produced:
ATC = AFC+AVC or TC/Q
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……..is the additional output a firm produces as a result of hiring
one more worker.
and determined by how much total output increases as each
additional worker is hired.
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………because the Law of Diminishing Marginal
Returns states that, at some point, adding more of
a variable input, such as labor, to the same
amount of a fixed input, such as capital, will cause
the marginal product of the variable to decline.
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Marginal Cost:
The change or additional cost to a firm’s total
cost from producing one more unit of a good
or service.

TC
MC 
Q
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……is the relationship between the inputs employed by the firm
and the maximum output it can produce with those inputs
In-Class Assignment
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2.00
1.80
MC Curve
Costs per Unit
1.60
1.40
1.20
ATC Curve
1.00
0.80
AVC Curve
0.60
0.40
AFC Curve
0.20
0.00
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27
32
36
39
Output/Quantity of Consultations Produced
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Because: When the marginal product of labor (MPL) is
rising, the marginal cost (MC) of output will be falling.
When the marginal product of labor is falling, the
marginal cost of production will be rising.
Or
The marginal cost of production falls and then rises – a
U-shape – because the marginal product of labor rises
and then falls.
Or
When marginal cost is below average total cost (ATC),
average total cost will fall. When marginal cost is above
ATC, average total cost will rise. Marginal cost will equal
ATC when average total cost is at its lowest point.
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 The marginal cost (MC), average total cost (ATC), and average
variable cost (AVC) curves are all U-shaped, and the marginal
cost curve intersects the AVC and ATC curves at their minimum
points. When marginal cost is less than either AVC or ATC, it
causes them to decrease. When MC is above AVC or ATC, it
causes them to increase. Therefore, when MC equals AVC or
ATC, they must be at their minimum points.
 As output increases, average fixed cost (AFC) gets smaller and
smaller, because in calculating AFC we are dividing something
that gets larger and larger – output – into something that
remains constant – fixed cost. Otherwise known as spreading
the overhead.
 As output increases, the difference between ATC and AVC
decreases because the difference between ATC and AVC is
AFC, which gets smaller as output increases.
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Long-Run Average Total Cost:
The cost to produce each unit of a product given that the
company can choose the size of plant that is best for that
quantity.
Long-Run Average Total Cost Curve (LRAC):
A curve showing the lowest cost at which the firm is able to
produce a given quantity of output in the long run, when no
inputs are fixed.
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Economies of Scale:
Exist when a firm’s long-run average costs fall as it
increases output. The law of diminishing marginal
returns does not apply in the long-run.
 Specialization
 Large Machinery
 Learning Curve / Learn by Doing
 Dynamic increasing returns to scale
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Diseconomies of Scale:
Exist when a firm becomes large and its long-run average costs
rise as it increases output.
 Transportation costs
 Principal-agent problem
 Shirking
 Bureaucracy – hierarchy
 Different processes – different specialists
Constant Returns to Scale:
Constant returns to scale exist when a firm’s long-run average
costs remain unchanged as it increases output.
Minimum Efficient Scale:
The level of output at which all economies of scale have been
exhausted.
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MARKET STRUCTURE
CHARACTERISTIC
PERFECT
COMPETITION
MONOPOLISTIC
COMPETITION
OLIGOPOLY
MONOPOLY
Number of firms
Many
Many
Few
One
Type of product
Identical
Differentiated
Unique
Ease of entry
High
High
Identical or
differentiated
Low
Examples of
industries
• Wheat
• Apples
• Selling DVDs
• Restaurants
• Manufacturing
computers
• Manufacturing
automobiles
• First-class
mail delivery
• Tap water
Entry blocked
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