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College of Business Administration
Assignment #2
ECON 1312
Introduction to Microeconomics
Jamal M. Alghamdi
ID: 201102849
Instructor: Dr. Mohammad A. Magableh
Fall Semester, Academic Year 2012/2013
December 7, 2012
Section: 102
Chapter 7: Analysis of Costs
Total costs: represents the lowest total expense needed to produce each lever of
output q.
Fixed const: represents the total dollar expense that is paid out even when no output
is produced; fixed cost is unaffected by any variation in the quantity of output.
Variable cost: represents expenses that vary with the level of output- such as raw
materials, wages, and fuel- and includes all costs that are not fixed.
Marginal cost: represents the increase in total variable cost as a result of producing
one more unit of output.
Least cost rule:
𝑴𝑷𝑳
𝑷𝑳
=
𝑴𝑷𝑨
𝑷𝑨
=
𝑴𝑷𝒂𝒏𝒚𝒇𝒂𝒄𝒕𝒐𝒓
𝑷𝒂𝒏𝒚 𝒇𝒂𝒄𝒕𝒐𝒓
: to
produce a given level of output at least
cost, a firm should buy inputs until it has equalized the marginal product per dollar
spent on each input.
TC = FC + VC: as fixed cost is costs for fixed inputs that do not vary with the level
of output and variable cost is cost of variable input that vary with the levels of output.
Finally, total cost is naturally the sum of all costs which in this case are fixed cost and
variable cost and that is given in the equation above.
AC = TC ⁄ q = AFC + AVC: average cost is calculated by dividing total cost by total
output. As total cost is the sum of fixed and variable cost then the average cost is also
the sum of average fixed cost and average variable cost.
Income statement (profit-and-loss statement): shows the flow of sales, cost and
revenue over the year or accounting period. It measures the flow of dollars into and
out of the firm over a specified period of time.
Sales, cost, profits, and depreciation: first sales represent the number of units sold at
a price level. Cost represent the amount of money required to make a product. Profit
represent the amount of money made after selling a product and it is calculated by
subtracting total cost from revenue. Depreciation measures the amount of capital that
has been used up in a year.
Fundamental balance sheet identity: indicates an instantaneous financial picture or
snapshot. It is like a measure of the stock of water in a lake. The major items are
assets, liabilities, and net worth.
Assets, liabilities, and net worth: assets are valuable properties or rights owned by
the firm. Liabilities are money or obligation owed by the firm. Net worth are called
net value and equal to total assets minus total liabilities.
Stocks vs. flows: a stock represents the level of a variable, such as the amount of
water in a lake or, in this case, the dollar value of a firm. A flow variable represents
the change per unit of time, kike the flow of water in a river or the flow of revenue
and expenses into and out of a firm. The income statement measures the flows into
and out of the firm, while the balance sheet measures the stock of assets and liabilities
at the end of the accounting year.
Opportunity cost: is the value of the most valuable good or service forgone.
Therefore, decisions have opportunity costs because choosing one thing in a world of
scarcity means giving up something else.
Cost concepts in economics and accounting: cost could be divided in to two kinds.
First, explicit cost which also known as accounting cost and this kind is a cost that
firms is actually paid out in money. The second kind is implicit cost and it is a cost
that does not require and actual expenditure of money. From an economist point of
view cost is calculated by adding both explicit cost and implicit cost. Implicit cost is
also counted as the opportunity cost of the factors of production that the firm owns.
Whereas, from an accountant point of view cost is calculated by adding explicit cost
only.
Chapter 8: Analysis of Perfectly Competitive Markets
P = MC as maximum-profit condition: a firm will maximize profit when it
produces at that level where marginal cost equals price. A profit-maximizing firm will
set its output at that level where marginal cost equals price. Diagrammatically, this
means that a firm's marginal cost curve is also its supply curve.
Zero-profit condition, where P = MC = AC: the zero-profit point comes where
revenues equal total cost. When the price falls below total cost the firm will make
losses but when price is equal to total cost this will be the break-even point of a firm
where the make no profits and also no losses.
Shutdown point, where P = MC = AVC: the shutdown point comes where revenues
just cover variable costs. When the price falls below average variable costs, the firm
will maximize profits (minimize its losses) by shutting down.
Summing individual ss curves to get industry ss: the market supply curve for a
good in a perfectly competitive market is obtained by adding horizontally the supply
curves of all the individual producers of that good.
Long-run zero-profit condition: in a competitive industry populated by identical
firms with free entry and exit, the long-run equilibrium condition is that price equals
marginal cost equals the minimum long-run average cost for each identical firm:
P = MC = minimum long-run AC = zero-profit price
Producer surplus + consumer surplus = economic surplus: producer surplus which
is the area between the price line and the SS cure. The producer surplus includes the
rent and profits to firms and owners of specialized inputs in the industry and indicates
the excess of revenues over cost of production. Whereas, consumer surplus measures
the extra value that consumers receive above what they pay for a commodity. Finally,
economic surplus is the welfare or n utility gain from production and consumption of
a good; it is equal to the consumer surplus plus the producer surplus.
Efficiency = maximizing economic surplus: this happened when MC = MU. A
perfectly competitive economy is efficient with the given equation and also it is the
equation to maximize profit. As economic surplus is driven from the sum of consumer
and producer surpluses, it is only natural to have the maximum when they intersect.
Allocative efficiency, pareto efficiency: pareto efficiency ( or sometimes just
efficiency) occurs when no possible reorganization of production or distribution can
make anyone better off without making someone else worse off. Under the conditions
of allocative efficiency, one person's satisfactions or utility can be increased only by
lowering someone else's utility. So, the difference is that pareto efficiency is about
suppliers and alocative efficiency is about consumers.
Conditions for allocative efficiency: MU = P = MC: the perfectly competitive
market is a device for synthesizing a. the willingness of consumers possessing dollar
votes to pay for goods with b. the marginal cost of those goods as represented by
firms' supply. Under certain conditions, competition guarantees efficiency, in which
no consumer's utility. This is true even in a world of many factors and products.
Efficiency of competitive markets: this is occur when MU= MC. This means that
the utils gained from the last unit of good consumed exactly equal the leisure utils los
from the time needed to produce that last unit of good. It is this condition that the
marginal gain o society from the last unit consumed equals the marginal cost to
society of that last unit produced which guarantees that a competitive equilibrium is
efficient.
Efficiency vs. equity: efficiency means absence of waste or the use of economic
resources that produces the maximum level of satisfaction possible with the given
inputs and technology. On the other hand, equity is the concept or idea of fairness in
economics, particularly in regard to taxation or welfare.