Microeconomics Cue Card - the Educator Login page!

Law of Diminishing Returns—As extraunits of a variable resource/input (labor) areadded to fixed resources (capital,land),output (product, quantity) will decline atTPsome point.TP 1) If TP,MP2) If TP LessDiminishing,1 2 3MP↓ to 0MPQ3) If TP↓,Labor1 2 3MP QMPNegative.Fixed inputs-Short run onlyShort Run Production Costs—TC=FC+VCATC=AFC+AVCTCCost FC VCCostAVCTCAFCVCFCQATCAVCAFCTC/Q=ATCVC/Q=AVCFC/Q=AFCFixed costscan’t changein the shortrun.Variable costscan change inthe short run.Marginal Costs: MC is the cost of producingone more unit of output.MC crossesCostsATC andAVC atMC their lowestpoints.ATCAVCNorelationshipbetweenMC andAFCQMC at lowest point whenMarginal Product (MP) is at itshighest point. These curves are mirror images.Long Run ATC – All resources variable, none fixedATCEconomies Constant Diseconomiesof Scale Returns of Scale LR ATCto Scaleq1 q2 OutputEconomies of Scale due to labor & managerialspecialization, efficient capitalper unit costs↓Constant Returns to Scaleper unit costs constantDiseconomies of Scale due to inefficiencies fromlarge, impersonal bureaucracyper unit costsPerfect Competition – The FirmCharacteristics**Very largenumber of firms**Standardizedproducts**Price takers**Easy entry intoand easy exit frommarket**No non-pricecompetition(advertising)**Ex: AgricultureMonopoly – THEORY OF FIRMCharacteristics**One firm=industry**Unique productwith no closesubstitutes**Price maker**Many barriers,entry blocked**Little advertisingexcept for publicrelations**Ex: local utilities,patented drugsProfit Maximization RuleMR=MCp P=MC ATCMCp e MR=dATCEconomic profitfFirm q q*p=MR=d=AR for firm*q where MR=MC*economic profits area(p,e,f,ATC)Why Demand andMR aren’t the same:MRAVCpMCATCATC e AVCpLoss fMR=dFirm q q*p=MR=d=AR for firm*q where MR=MC*loss area (ATC,e,f,p)--pricebelow ATC & above AVC*Fixed costs are covered(space between ATC & AVC).Profit Maximizing RuleMR=MCP/CMCPm e ATCATCProfitsfMR=MCQm MR Q**Qm where MR=MC**Pm where Qm intersects D**Eco Profit = (Pm-ATC)Qmor Economic Profit=TR-TC**Efficiency loss (e, f, MR=MC)DppShut Down DecisionP MC Pc=MCpm A MC ATC Eli Lily producespcBProzacDqm qc QMR1. A P1, Q1 – Monopoly with profits, efficiency loss2. Δ The patent protecting Prozac runs out andother firms now produce the generic drug competition firm becomes price taker3. B ↓pc, qcSally Dickson, Austin, TX