1. 1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2. 2 Technology (1) Variable Factors Factors:  One that can be varied quickly and easily to increase or decrease output within a production unit (or plant) of a given size. (2) Fixed Factors:  Ones that cannot be varied quickly or easily.  The quantity of the fixed factors determine the size of the plant. Long-Run vs. Short-Run First we must define variable and fixed factors of production (or inputs).

3. 3 Technology Short-Run: Long enough to alter the variable but not the fixed factors of production. Long-Run: Long enough to alter both the variable and the fixed factors of production; but cannot alter the technology. Very-Long-Run: Long enough for even the basic technology to be changed.

4. 4 Technology INDUSTRY INDUSTRY:  All the firms in one line of business.  The firms can each have a number of plants. So there is the following hierarchy: Industry Firms Plants

5. 5 Technology A technical, mathematical relationship that tells the maximum amount of output that can be produced with a given set of inputs, given the current state of technical knowledge. Production Function Total Product (TP) = f (inputs) TP = f (capital, land, labor,...) or Example:Corn = f(land, labor, sun) 10 bu.= 1 acre + 5 work hours + 100 watts of sun energy per square acre.

6. 6 Technology (1) Total Product  TP. (2) Average Product  AP. Product Concepts  product per unit of an input factor.  AP of labor (AP L ) =  AP of capital (AP K ) = (3) Marginal Product  MP. The change in TP that comes from using one additional unit of a factor. TP, AP, MP,...

7. 7 Technology Units of LaborTPMP L AP L 00-- 11000 2300020001500 335005001167 43800300950 53900100780 Example:

8. 8 Relationship Between TP and MP 4,000 0 12345 3,000 2,000 1,000 Labor Units (L) 4,000 0 12345 3,000 2,000 1,000 Labor Units (L) Diminishing MP

9. 9 Relationship Between MP and AP Product Labor Units MP AP Summary: (1) If MP is above AP  is rising. (2) If MP is below AP  is falling. (3) If MP is equal AP  is peaking out.

10. 10 Law of Diminishing Marginal Returns If additional units of a variable factor are added to a fixed factor, eventually the marginal product of the variable factor will decrease. The Law of Diminishing Marginal Returns!

11. 11 Cost Concepts I. Total Costs (TC) — whatever total cost is for any level of output Two Sub-Components: (A)Total Fixed Costs — TFC (Overhead Costs) — do not vary with output. (B) Total Variable Costs — TVC — vary with output. Note: TC = TFC + TVC

12. 12 Cost Concepts II. Average Total Costs (ATC) Two Sub-Components: (A) Average Fixed Cost: (B) Average Variable Cost: Two Average Costs!! Note: ATC = AFC + AVC

13. 13 Cost Concepts III. Marginal Costs (MC)

14. 14 Cost Concepts Cost Output or TP I. Graph of Total Cost Concept TC TVC TFC (TFC)

15. 15 Cost Concepts Cost Output II. Graph of Average & Marginal Cost Concept AVC AFC ATC MC QCQC

16. 16 Cost Concept (1) When marginal is below average average is falling. (2) When marginal is above average average is rising. (3) When marginal is equal average average is at its lowest point. Definition: Capacity — The output level that corresponds to the minimum point on the short-run ATC curve. Excess Capacity  Producing at any output level smaller than the capacity level QC.QC. — By producing more, the firm could get to cheaper per unit costs. Summary of Relationship Between Marginal Cost & Average Cost

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