Premium Essay

Principles of Microeconomics

In:

Submitted By Jubair121
Words 570
Pages 3
ECN 201
PRINCIPLES OF
MICROECONOMICS
LECTURE 9
Topic: Output & Costs

Short Run Costs
Short Run- At least one factor of production is held fixed. Usually capital is held fixed and labor is held variable.
Relationship between output and costs can be described by three concepts: 1. Total cost
2. Marginal cost
3. Average costi. ii. Average fixed cost
Average variable cost

Short Run Costs
 Total cost (TC)- A firm’s total cost is the cost of all factors of production it uses. Total cost = total fixed cost + total variable cost.
 Total fixed cost (TFC)- Cost of the firm’s fixed factors. Eg. Cost of machine, land, building etc. TFC does not change with output; it remains constant.
 Total variable cost (TVC)- Cost of the firm’s variable factor of production; eg. labor cost (wage bill). TVC changes with total output.

Total Cost (TC) Curve
 Total Cost Curve comes from the idea of Total Product
Curve (production function).
 Shape of TC curve: Recall in TP curve, initially as marginal labor productivity (MPL) is higher, firm can get the work done with fewer workers and so the associated cost of production will increase at a slower rate. Later as MPL gets lower, to do the same work it will take more and more labor; and the associated cost of production will increase at a faster rate!

 Total Cost, TC = FC + VC
 Fixed cost (FC) is fixed/constant for any level of output. So the shape of TC actually comes from the shape of VC.

Short Run Costs
Average Variable Cost: variable cost divided by the units of output produced ;
AVC = TVC / Q
Average Fixed Costs: fixed cost divided by the units of output produced;
AFC = TFC / Q

Average Total Cost: total cost divided by the units of output produced;
ATC = TC / Q. It can also be ATC = AFC + AVC

Marginal Cost Curve
 MC = ∆TC/∆Q ; MC is the slope of TC
 MC curve is U-shaped-Why?
TC (and TVC) increase at a decreasing rate at

Similar Documents

Premium Essay

Principles of Microeconomics

...Principles of Microeconomics Paper Why does human action imply the Law of Marginal Utility? This can be supported by the Diamond-water Paradox explained by the economist Adam Smith. It can be further supported by the Law of Diminishing Marginal Utility. As well, if you already have multiple units of a good or service, each will have its own value and desired end. All of this information will come from the simply perfect book Foundations of Economics a Christian View by Shawn Ritenour, by far the best investment I have ever made. Every decision we make we weigh all of our options and choose the highest desired end without even realizing we do it, this can be explained by human action and marginal utility. In 1776 the economist Adam Smith wrote a famous book called The Wealth of Nations, in this book he talked about this Diamond-water Paradox thing. You’re probably wondering what this thing is, or how it could possibly have to do with marginal utility. Well luckily for you I’m here to explain it to you. Let’s first start by defining paradox, Merriam-Webster defines a paradox as a statement that seems to say two opposite things but that may be true. Also we all know what water is and what diamonds are, so we can move past that. Smith states that water is much more useful than diamonds, but diamonds are much more valuable than water. Why is this? You would think that something such as water that is more useful and needed to live would be the more valuable than diamond but it...

Words: 862 - Pages: 4

Premium Essay

Principles of Microeconomics

...NAME: ______________________________________________ PROBLEM SET 1 1. During a tragic event, Charlie Sheen and his former boss Chuck Lorre were lost at sea. Fortunately, the pair washed up on the shore of a deserted island. The two start to work to build a better life on the island. Sheen can gather 10 coconuts or catch 1 fish per hour. Lorre can gather 30 coconuts or catch 2 fish per hour. What is Sheen’s opportunity cost of catching one fish? One coconut? What is Lorre’s? Who has an absolute advantage in catching fish? Who has the comparative advantage in catching fish? Sheen’s opportunity cost of catching 1 fish: ___________________________ Sheen’s opportunity cost of gathering 1 coconut: ___________________________ Lorre’s opportunity cost of catching 1 fish: ____________________________ Lorre’s opportunity cost of gathering 1 coconut: ___________________________ Who has an absolute advantage in catching fish? ________________________ Who has the comparative advantage in catching fish? _____________________ 2. Based on the information provided for the market for video games, answer the following questions. |PRICE |Q DEMANDED |Q SUPPLIED | |$50 |5 |9 | |$45 |7 |7 | |$40 |9 |5 | |$35 |11 |3 ...

Words: 554 - Pages: 3

Premium Essay

Principle of Microeconomic

...Professor Kosten Banifoot, a prominent supporter of the National Aeronautics and Space Administration’s (NASA) space shuttle program, estimated that the gains from the program are currently $24 billion per year (an average of $6 billion per launch) and that its costs are relationship between the number of shuttles launched and the total cost of the program is as described in Table 1.1. On the basis of these estimates, Professor Banifoot testified before Congress that NASA should definitely expand the space shuttle program. Should Congress follow his advice? Explain. In your opinion, how many space shuttles should NASA launch? Number of launches | Total cost ($ billion) | Average cost ($ billion) | 0 | 0 | 0 | 1 | 3 | 3 | 2 | 7 | 3.5 | 3 | 12 | 4 | 4 | 20 | 5 | 5 | 32 | 6.4 | Table 1.1 Answer: First at all, we must compare the marginal cost of a launch to its marginal benefit. However, the professor just tells us only the average cost and average benefit of the program. There are the total cost of the program divided by the number of launches and the total benefit divided by the number of launches. The average benefit and average cost per launch for all shuttles launched thus far is simply not useful for deciding whether to expand the program. The average cost of the launches undertaken so far might be the same as the cost of adding another launch. But, it also might be either higher or lower than the marginal cost of a launch. The benefit of an additional...

Words: 1254 - Pages: 6

Premium Essay

Microeconomic Principles - Definitions and Examples

...I. DEFINITIONS Net Profit Margin (NPM) NPM of a firm is simply the percentage of net income (NI) from total operating revenue (TOR). This indicates, after subtracting tax, how much profit the firm has generated. For example, if IKEA accumulates, over a single period, total sales revenue of $100M, but recapitalizes part of that income (about $50M), and needs to pay tax of 40% of the earnings, it will end up with a free cash flow of $30M. NPM is simply $30M / $100M x 100%, which equals 30%. Capital Capital includes any long term assets that are invested into an organization for it to be able to run its operations, whether providing goods or services. For example, if there is a start-up pizza restaurant, it will require a capital investment, that is, the acquiring of assets such as the building where the pizza will be made and served, the equipment that will be used for the cooking of the pizza such as the oven, and any profit made that would be re-injected into the future development of the pizza restaurant. Learning Curve A learning curve in economics is a concept similar to that of marginal utility. It highlights how new economic notions are easily learned and applied, but the subsequent ideas are harder to achieve. Therefore, a graph that represents the progression of an idea will show a steep incline that decelerates into a plateau. This applies to both customer utility of a product and company skill development. For example, when Apple first released its iOS7...

Words: 2733 - Pages: 11

Premium Essay

Econ212-1402b-04 Principles of Microeconomics

...Ralph Thomas ECON212-1402B-04 Principles of Microeconomics Professor: Lance Brofman Phase: 2 Individual Projects June 2, 2014 What is the price elasticity of demand? What determines it? What is elastic and inelastic demand? The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD), (Moffat, M., para1 economic, about.com) is: PEoD = (% Change in Quantity Demanded)/ (% Change in Price) * If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)  * If PEoD = 1 then Demand is Unit Elastic  * If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes) The price of a laptop increases by 20% and there is a 40% drop in the quantity demanded. =40/20 =2 The price of a pack of cigarettes increases by 10% and there is a 5% drop in the quantity demanded =10/5 =2 Why is elasticity an important concept for a business? If you use elasticity of demand information to predict the potential impact of a price fluctuation on the total sales revenue, the price elasticity of demand is a way of looking at the sensitivity of price related to product demand. Demand elasticity is an economic concept also known as price elasticity. Price elesticy can be a confusing at times but its main reason is to help the company gain the maximum profit possible. If you utilize the versatility of...

Words: 1110 - Pages: 5

Premium Essay

Micro Econ

...Principles of Microeconomics: At a Glance Description of the Examination The Principles of Microeconomics examination covers material that is usually taught in a one-semester undergraduate course in introductory microeconomics. This aspect of economics deals with the principles of economics that apply to the analysis of the behavior of individual consumers and businesses in the economy. Questions on this exam require test-takers to apply analytical techniques to hypothetical as well as real-world situations and to analyze and evaluate economic decisions. Test-takers are expected to demonstrate an understanding of how free markets work and allocate resources efficiently. They should understand how individual consumers make economic decisions to maximize utility, and how individual firms make decisions to maximize profits. Test-takers must be able to identify the characteristics of the different market structures and analyze the behavior of firms in terms of price and output decisions. They should also be able to evaluate the outcome in each market structure with respect to economic efficiency, identify cases in which private markets fail to allocate resources efficiently, and explain how government intervention fixes or fails to fix the resource allocation problem. It is also important to understand the determination of wages and other input prices in factor markets, and to analyze and evaluate the distribution of income. The examination contains approximately 80 questions...

Words: 1829 - Pages: 8

Premium Essay

Microeconomics and the Laws of Supply and Demand

...Microeconomics and the Laws of Supply and Demand To purchase this visit here: http://mindsblow.us/question_des/MicroeconomicsandtheLawsofSupplyandDemand/2779 Contact us at: help@mindblows.us Complete one of the following options: Option 1: Complete the Supply and Demand Simulation. Write a 1,050- to 1,400-word paper summarizing the content of the simulation and address the following: Identify two microeconomics and two macroeconomics principles or concepts from the simulation/video. Explain why you have categorized these selected principles or concepts as microeconomics or macroeconomics. Identify at least one shift of the supply curve and one shift of the demand curve in the simulation/video. Explain what causes the shifts, and how each shift affects the price, quantity, and decision making. Include responses to the following: How might you apply what you learned about supply and demand from the simulation/video to your workplace or your understanding of a real-world product with which you are familiar? How do the concepts of microeconomics help you understand the factors that affect shifts in supply and demand on equilibrium price and quantity? How do the concepts of macroeconomics help you understand the factors that affect shifts in supply and demand on the equilibrium price and quantity? How does the price elasticity of demand affect a consumer's purchasing and the firm's pricing strategy as it relates to the simulation/video? Cite a minimum of 3 peer...

Words: 936 - Pages: 4

Premium Essay

Microeconomic and the Laws of Supply and Demand

...Microeconomics and the Laws of Supply and Demand Eco 365 Instructed by: The purpose of this paper is to review and discuss how the principles of both macroeconomics and microeconomics are pertinent to many aspects of our daily lives in ways that a mass majority of individuals has never stopped to think about. The discussion herein is based on a simulation involving rental apartments in Atlantis that are all owned by the same company known as Goodlife. It is important to anyone individual or company in their growth to know when to know what a good price is, when to spend money, when to save money, and what to do in between, and to do so you must understand the concept of supply and demand and how to utilize the information. Most people understand the basic aspects of this; however, to be effective one must know the importance of how both macro and microeconomics are to our ways of living. Further at it relates to the simulation, discussions in this paper will consist of identifying both a supply and demand curve and explain what happens when a shift takes place as well as their different areas of impact. Lastly, I will discuss price elasticity and how a persons spending. Macro and Microeconomic Principles Here is a quick review of two important terms and definitions. Pursuant to Colander (2013), “Macroeconomics is the study of the economy as a while” and “Microeconomics is the study of how individual choices are influenced by economic forces”...

Words: 945 - Pages: 4

Premium Essay

Macroeconomics and the Laws of Supply and Demand

...Microeconomics and the Laws of Supply and Demand Nicholas Perry ECO/365 May 26, 2014 Tarron Khemraj Microeconomics and the Laws of Supply and Demand In the Supply and Demand Concept Simulator, there were several microeconomic and macroeconomic principles covered. Also, there were shifts in the supply or demand curve throughout the simulator, and I will explain the shifts in greater detail. To understand what microeconomic principles were used in the simulator, understanding what microeconomics means is important. Microeconomics is the study or analysis of the economy or market on an individual or business level. It focuses on individual buyers and sellers within businesses. One example from the simulator of microeconomics is when Susan asked me to decrease the vacancy rate to 15 percent. In order to do this, I must decrease the cost of the apartments to try and increase the demand or interest in vacant apartments. The reason this is microeconomics is because the decision a decision made on an individual level and has to do with the buyer and seller only to benefit my business. Susan later asked me to lease out all 2,500 available two-bedroom apartments available. In order to do this, Hal suggest we raise the monthly rental cost for the two bedroom apartments so we can cover the maintenance cost. We have to do this in order to stay profitable. This is microeconomics because again, it is focused around the buyer (renters) and the seller (GoodLife Management). The...

Words: 857 - Pages: 4

Premium Essay

Difference Between Microeconomics and Microeconomics

...Differentiate between Microeconomics and Macroeconomics Name Institution Differentiate between Microeconomics and Macroeconomics According to (Krugman, 2005), Microeconomics involves analysis of individual economic units such as households, demand, and supply and market equilibrium. Macroeconomics, on the other hand, includes analysis of aggregate economic variables such as national income, inflation, unemployment and interest rates. My primary objective in this paper, therefore, is to differentiate between macroeconomics and microeconomics. This fact alone cannot distinguish macro and microeconomics. Nevertheless, microeconomics and macroeconomics are interdependent. While analyzing macroeconomics an economist has to ask questions which affect the standards of living of an entire country. Such issues will be related to inflation, unemployment, national income, product markets, fiscal policies, international trade, economic growth and interest rates (Mankiw, 2007). On the other hand, an economist while analyzing Microeconomics will look at individual’s purchasing power, demand, supply, income, utility level, labor markets, production, consumption and opportunity cost. Macroeconomics is concerned with the national income and the gross domestic product while Microeconomics is concerned with the impact of an increase or decrease in a single economic variable (Krugman, 2005). Microeconomics works on the principle that prices of goods and services are determined by the...

Words: 303 - Pages: 2

Premium Essay

Economics Essay

...Supply and Demand Microeconomics and macroeconomics are both very similar and they both effect economic decisions made by people. Microeconomics focuses on the individual, or the household, and how they make financial and economic decisions. Macroeconomics focuses on the economy, and people, as a whole. It studies what society does financially as a whole. I read the exercise and I also watched the video, but this paper will focus on the video we watched about the apples and pears. There were several microeconomic principles presented in this video. One example of a principle of microeconomics is the increase in demand of apples after apples were said to cure cancer. This causes more people to want to purchase apples. This increase in demand increases the price as well, and the increase in price will cause the supply to go up to. The video also showed an example of how supply can shift as well. In the first example, there was a new invention that helps to prevent apples from disease. This helps the growers out immensely and they are now able to produce and sell more apples. This change in supply causes the supply curve of apples to increase to the right. This shift in quantity supplied causes the price of apples to drop. Both of these are examples of microeconomics. The decision on whether to purchase apples is up to the consumer, or individual, and is based on the price of apples or the benefits of apples. A consumer will always buy the cheaper product or they...

Words: 618 - Pages: 3

Premium Essay

Supply and Demand

...demand is high, the price will be high. In dissimilarity, the larger the supply and the lower the demand, lower the price will be. Microeconomics vs. Macroeconomics The supply and demand simulation displays different facets of economic structures. Even though typically concentrated on microeconomics, the simulation shows a unimportant aspect of macroeconomics. The principles of microeconomics will apply to a drop in rent prices to escalate the supply being demanded. An additional microeconomic principle displayed in the simulation is the rise in demand if the cost of rent is dropped. Macroeconomics principles come into play when the rise in demand for apartment was a direct product of the founding of a new company in town. The same principles of microeconomics relate to a surplus supply generated by a price ceiling applied by the government. While navigating through the simulation I was a focused on supply and demand and how it relates to the housing market in the city of Atlantis. It was a challenge as a property manager of Goodlife Management, superintending properties and forming the correct decisions to provide appropriate costs with the new scenarios. I myself had to revisit the site several times just to understand the concepts and clearly see my choices were not working out for the plan that the simulation was giving. Two microeconomics concepts that were present in the simulation was supply and demand. Demand is summarizes as the need or want of a product with the...

Words: 756 - Pages: 4

Premium Essay

Microeconomics and the Laws of Supply and Demand

...Microeconomics and the Laws of Supply and Demand Terry Cerami ECO/365 September 21, 2015 David Flesh Microeconomics and the Laws of Supply and Demand Utilizing the supply and demand simulation ("University Of Phoenix", 2014), I will illustrate two macroeconomic and two microeconomic principles demonstrated in the simulation and expound on why these principles are categorized as microeconomic or macroeconomic. Also, one shift of the demand curve and one shift of the supply curve from the simulation will be identified with explanations for the shifts. Further, I will analyze the influence on decision making in correlation with quantity and the equilibrium of price and how these concepts of demand and supply can be pragmatic in everyday business or within the current work environment. Finally, I will explain how price elasticity of demand has an immense impact on products pricing strategy and its purchase from the consumer. Macroeconomic and Microeconomic Principles The first macroeconomic principle demonstrated within the Supply and demand Simulation is Price Ceilings. Price Ceilings ensue through legislation as laws are enacted establishing a lawful ceiling of how high the cost of a product can be ("Price Ceilings", n.d.). When a price ceiling is established, there is further demand than what is available at the equilibrium price. This is a result of there being a sufficient supply in quantity of demand than supplied quantity. For example, in the simulation the...

Words: 1134 - Pages: 5

Premium Essay

Eco 365

...Supply and Demand ECO365 July 23, 2013 Supply and Demand Microeconomics vs. Macroeconomics The supply and demand simulation shows different aspects of economic structures. Although mostly focused on microeconomics, the simulation does show a small role of macroeconomics. The principles of microeconomics would apply to drop in rent prices to increase the supply being demanded. Another microeconomic principle shown in the simulation is the rise in demand when the cost of rent is lowered. Macroeconomics principles came into play when the rise in demand for apartment was a direct product of the establishment of a new company in town. Same principles of microeconomics apply to an excess supply created by a price ceiling enforced by the government. Supply and Demand Shifts A shift in the demand curve was created when the new company brought an increase in population to Atlantis. A greater amount of people created a greater demand for the apartments. Equilibrium is reached in the demand shift by raising the price of rent to decrease demand. A supply shift was created when 400 apartments were converted into condominiums, which in turn caused a drop in supply. The equilibrium would be fixed by raising the cost to lower the demand because of a decrease in supply. Real World Application With the nutritional corporations expanding and health awareness on the rise prices of nutritional supplements are rising to meet the demand. Especially in local areas, there aren’t too many...

Words: 554 - Pages: 3

Premium Essay

Demand, Supply and Prices in the Housing Industry

...Demand, Supply and Prices in the Housing Industry F. Hill ECO/365 Principles of Microeconomics July 30, 2014 Mr. Keith Watts Abstract The slowdown in the housing market in the US has been accompanied by a sharp fall in house prices and a glut of homes for sale in the market. While the idea that this high number of dwellings for sale should place downward pressure on house prices is intuitive, little empirical work has been done in this area to assess the factors affecting house prices. This paper explicitly models the relationship between changes in prices of houses and various measures of housing demand and supply. A simulation model has been included to help explain the evolution of the housing market and enable one determine the equilibrium price, quantity and prices. The company under consideration is GoodLife management- a property management company that manages seven communities in the city of Atlantis. Keywords: Housing market, supply and demand, price elasticity and economics. Introduction From the demand and supply curve of the firm, various microeconomics and macroeconomics can be identified. Microeconomics looks at the behaviors of individual people and companies within an economy. It is based on the idea of a market economy, in which forces of demand and supply are behind prices and production levels of goods and services. Microeconomics is concerned with supply and demand in individual markets, individual consumer behavior and individual labor markets...

Words: 1095 - Pages: 5