The Firm and its Customers
Inputs= factors of production
Outputs = the objects that provide us with utility
Demand Curve = The curve that gives the quantity consumers will buy at each possible price.
(measure of willingness to pay)
- determines what is feasible
- high price = small quantity
- low price = large quantity
• total costs = unit cost x quantity
• total revenue = price x quantity
• pro t = total revenue - total cost
Isopro t curves join points that give the same level of total pro t (the rms indi erence curve).
- Slope of the curve = MRS ( eg. willing to substitute a high price for a lower quantity in order to
get the same pro t
- Slope of demand curve = MRT
Pro t function = the pro t you would achieve if you chose to produce a quantity, Q, and set the
highest price that would enable you to sell the quantity, according to the demand function.
Marginal pro t = slope of the total product curve
= ΔQ/ ΔL
= reaches its maximum at the point of in ection of the TP curve
Variable input = inputs that change in the short run
xed input = cannot be changed in the short run or if it costs too much to do so.
in long run all inputs become variable (eg. rent, interest on loans)
Economies of Scale:
1. Technological Advantages: Large scale production often uses fewer inputs per unit cost of
output
2. Cost Advantages: In larger rms, xed costs such as advertising have a smaller e ect on the
cost per unit and they may be bale to purchase their inputs at a lower cost because they have
more bargaining power. Happens if there is a xed cost
3. May result from specialisation
4. Demand Advantages: Large size rm may bene t a rm in selling its product, not just
producing it. Occurs when people are more likely to buy a product or service it it already has a
lot of users
Returns to scale:
1. Production increases more than proportionally = technology exhibits increasing returns to
scale
2. Production increases proportionally = technology exhibits constant return to scale
3. Production increases less than proportionally = technology exhibits decreasing returns to
scale
Large Firms= built in diseconomies of scale
- they have owners, managers, supervisors and production workers
- increasing production workers requires more than a proportional increase in supervision and
management
- production by a small group of people if thus often too costly to compete with larger rms
Production:
- Cost Function = The total cost for each level of output, Q. ( xed costs + variable costs)
- Fixed costs = When Q = 0 , the only costs are xed costs.
- Average costs = TC / Q
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Inputs= factors of production
Outputs = the objects that provide us with utility
Demand Curve = The curve that gives the quantity consumers will buy at each possible price.
(measure of willingness to pay)
- determines what is feasible
- high price = small quantity
- low price = large quantity
• total costs = unit cost x quantity
• total revenue = price x quantity
• pro t = total revenue - total cost
Isopro t curves join points that give the same level of total pro t (the rms indi erence curve).
- Slope of the curve = MRS ( eg. willing to substitute a high price for a lower quantity in order to
get the same pro t
- Slope of demand curve = MRT
Pro t function = the pro t you would achieve if you chose to produce a quantity, Q, and set the
highest price that would enable you to sell the quantity, according to the demand function.
Marginal pro t = slope of the total product curve
= ΔQ/ ΔL
= reaches its maximum at the point of in ection of the TP curve
Variable input = inputs that change in the short run
xed input = cannot be changed in the short run or if it costs too much to do so.
in long run all inputs become variable (eg. rent, interest on loans)
Economies of Scale:
1. Technological Advantages: Large scale production often uses fewer inputs per unit cost of
output
2. Cost Advantages: In larger rms, xed costs such as advertising have a smaller e ect on the
cost per unit and they may be bale to purchase their inputs at a lower cost because they have
more bargaining power. Happens if there is a xed cost
3. May result from specialisation
4. Demand Advantages: Large size rm may bene t a rm in selling its product, not just
producing it. Occurs when people are more likely to buy a product or service it it already has a
lot of users
Returns to scale:
1. Production increases more than proportionally = technology exhibits increasing returns to
scale
2. Production increases proportionally = technology exhibits constant return to scale
3. Production increases less than proportionally = technology exhibits decreasing returns to
scale
Large Firms= built in diseconomies of scale
- they have owners, managers, supervisors and production workers
- increasing production workers requires more than a proportional increase in supervision and
management
- production by a small group of people if thus often too costly to compete with larger rms
Production:
- Cost Function = The total cost for each level of output, Q. ( xed costs + variable costs)
- Fixed costs = When Q = 0 , the only costs are xed costs.
- Average costs = TC / Q
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