ECON111 Lecture Notes - Lecture 9: Average Cost, Diminishing Returns, Marginal Product
Week 9 Production and Costs
Firms
- Firms aim is to maximise profit
- Pi is the symbol for profit
- Profit = revenue (P x Q) - costs (rent, wages, interest, profit)
Normal profit
- The minimal profit required by the entrepreneur to remain in business
- Equal to the opportunity cost of the entrepreneur
- Includes salary, interest paying, interest losing
- Known as an implicit cost
Economic profit
- Takes explicit cost as well as implicit costs into account
- Smaller amount of profit
- Known as super normal profit (above normal profit)
- The difference between profit and normal profit
- TR - TC
Explicit Costs
- is a cost paid in money
Implicit Cost
- is the cost incurred by a firm when it uses a factor of production for which it
does not make a direct money payment. (e.g. economic depreciation and
resource costs by the owner)
Short run
- A time frame where at least one resource is fixed
- The fixed resource is usually the capital (K)
- Labour (L) is variable
- Marginal product = extra output produced by the extra worker (change in
quantity divided by the change in labour (rate of increase)
- MP is the slope of TP
Marginal Product
- the change in total product that results from a one-unit increase in the
quantity of labour employed.
- Marginal product = Change in total product divided by Change in quantity of
labour
- MP = ∆TP / ∆ L
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Increasing Marginal Returns
- When the marginal product of an additional worker exceeds the marginal
product of the previous worker
Decreasing Marginal Returns
- When the marginal product of an additional worker is less than the marginal
product of the previous worker.
Total Product
Labour
Quantity
Marginal Product
0
0
1
4
4 (increasing at an increasing rate)
2
8
4 (increasing at an increasing rate)
3
13
5 (increasing at an increasing rate)
4
16
3 (increasing at a decreasing rate)
5
17
1 (increasing at a decreasing rate)
6
17
0 (decreasing output from fixed capital)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Profit = revenue (p x q) - costs (rent, wages, interest, profit) The minimal profit required by the entrepreneur to remain in business. Equal to the opportunity cost of the entrepreneur. Takes explicit cost as well as implicit costs into account. Known as super normal profit (above normal profit) The difference between profit and normal profit. Explicit costs is a cost paid in money. Implicit cost is the cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment. (e. g. economic depreciation and resource costs by the owner) A time frame where at least one resource is fixed. The fixed resource is usually the capital (k) Marginal product = extra output produced by the extra worker (change in quantity divided by the change in labour (rate of increase) Marginal product the change in total product that results from a one-unit increase in the quantity of labour employed.