Single Input-Output Relationships

1
Single Input-Output Relationships
2
Key Cost Relationships
The following cost derivations play a key role in
decision-making Marginal cost ? total cost
? output
3
Key Cost Relationships
The following cost derivations play a key role in
decision-making Marginal cost ? total cost
? output Average variable total variable
cost output cost
4
Key Cost Relationships
The following cost derivations play a key role in
decision-making Marginal cost ? total cost
? output Average variable total variable
cost output cost Average total
total cost output cost
5
Page 102 in booklet
Costs associated with levels of output
6
45
PMRAR
Profit maximizing level of output, where MRMC
11.2
Page 102 in booklet
7
Average Profit 17, or AR ATC
PMRAR
45-28
28
Page 102 in booklet
8
Grey area represents total economic profit if the
price is 45
PMRAR
11.2 ? (45 - 28) 190.40
Page 102 in booklet
9
PMRAR
Zero economic profit if price falls to PBE. Firm
would only produce output OBE . AR-ATC0
Page 102 in booklet
10
PMRAR
Economic losses if price falls to PSD. Firm would
shut down below output OSD
Page 102 in booklet
11
Where is the firms supply curve?
PMRAR
Page 102 in booklet
12
Marginal cost curve above AVC curve?
PMRAR
Page 102 in booklet
13
Key Input Relationships
The following input-related derivations also play
a key role in decision-making Marginal
value marginal physical product price
product
14
Key Input Relationships
The following input-related derivations also play
a key role in decision-making Marginal
value marginal physical product price
product Marginal input wage rate,
rental rate, etc. cost
15
D
Wage rate represents the MIC for labor
C
E
B
F
G
5
I
H
J
Page 103 in booklet
16
Use a variable input like labor up to the point
where the value received from the market equals
the cost of another unit of input, or MVPMIC
D
C
E
B
F
G
5
I
H
J
Page 103 in booklet
17
D
The area below the green lined MVP curve and
above the green lined MIC curve
represents cumulative net benefit.
C
E
B
F
G
5
I
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Page 103 in booklet
18
D
If you stopped at point E on the MVP curve, for
example, you would be foregoing all of the
potential profit lying to the right of that point
up to where MVPMIC.
C
E
B
F
G
5
I
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J
Page 103 in booklet
19
If you went beyond the point where MVPMIC, you
begin incurring losses.
D
C
E
B
F
G
5
I
H
J
Page 103 in booklet