ECO100Y5 Chapter Notes - Chapter 7: Variable Cost, Marginal Product, Opportunity Cost
Chapter 7
While analyzing the supply side of the market we will have to make certain assumptions:
1. a firm is a single decision making-unit. This allows up to abstract from the firms governance or financial
structures
2. a firm's main goal is to maximize profits
3. produce a single product
Production
• a production functions give the maximum amount of output the firm can produce using with different combinations
of its inputs, labour and capital
• Q(output) = f( L,K) L-labour; K-capital
Profits
• accounting profits = revenue - explicit costs
• economic profits = revenue - (explicit costs + implicit costs)
• implicit costs
◦ a) opportunity cost of time - forgone salary of owners
◦ b) opportunity cost of financial capital - forgone return on next best investment
• total costs (explicit costs + implicit costs)
Profit Maximization
• we assume firms want to choose their inputs (and thus outputs) in order to maximize their economic profits
• economic profits = total revenue - total costs
Time Horizons
• the short run (SR) - a time period over which the quantities of certain inputs (most commonly fixed) cannot be
changed; we call these fixed input
• labour is a variable input
• the long run (LR) - a time period in which all inputs can be changed, but technology cannot change
• the very long run (VLR) - a time period long enough for production technology to change
◦ inputs don't have to change, but they can
Production in the Short Run
• total product (TP) - the total amount produced by a firm during some time period
• average product of labour (APL) - the goal product divided by the number of units of labour used in its production
• marginal product of labour (MPL) - the additional output produced using one more unit of labour
◦ MPL = change in TP / change in L
Activity AP MP
L
TP
AP
MPL
0
1
3
3
> 3
2
7
35
> 4
3
9
3
> 2
4
8
2
> -1
Law of diminishing marginal returns: adding additional units of a variable input will eventually lead to decreasing
marginal product of that input
Average product will be increasing if MP > AP, but decreasing if MP < AP.
• MP interescts AP at maximum point on graph
Costs in the Short Run
Total Cost (TC) – the total cost of producing any given level of output
• TC = TFC + TVC
Total Fixed Cost (TFC) – the cost of the fixed factor of production; does not vary with output
find more resources at oneclass.com
find more resources at oneclass.com
53
ECO100Y5 Full Course Notes
Verified Note
53 documents
Document Summary
While analyzing the supply side of the market we will have to make certain assumptions: a firm is a single decision making-unit. This allows up to abstract from the firms governance or financial structures: a firm"s main goal is to maximize profits, produce a single product of its inputs, labour and capital. Production in the short run: inputs don"t have to change, but they can, mpl = change in tp / change in l. Time horizons changed; we call these fixed input. Law of diminishing marginal returns: adding additional units of a variable input will eventually lead to decreasing marginal product of that input. Average product will be increasing if mp > ap, but decreasing if mp < ap: mp interescts ap at maximum point on graph. Total cost (tc) the total cost of producing any given level of output.
