AP REVIEW! An “awesome” prize is at stake.

Mini Candy Bars

TU

0 0

1 8

2 18

3 30

4 40

5 48

6 52

7 52

8 50

Referring to the table:

A. What is the MU of each unit consumed?

B. At what point will consumption stop?

8101210840-2

Stop consumption after 7 units.

CHAPTER 12 INTROA FOCUS ON SHORT-RUN SUPPLY

A switch -

We have been looking at how you, the customer, makes decisions.

We are now going to look at how firms make decisions.

We will focus on short-run decisions.

Factors of Production

Key to the discussion: Land, Labor, Capital, Entrepreneurship (and technology)

FoP are owned by individuals We will keep the cost of FoP constant to

simplify our discussion.

Supply More complicated than demand.

All supply comes from individuals not firms (because people own the FoP)

Supply exists because of incentives –

(work or stay home?) (sell or keep?)

It depends on opportunity cost.

PRODUCTION

Definition: Transforming the supply of factors of production into goods and services that we use.

We will also separate the supply of produced goods from the factors of production (FoP) to make analysis easier.Prices of produced goods and services will be

allowed to vary.

Remember: Our focus is on a firms short-run decisions..

Roles of the Firm 3 Roles

Organize the factors of productionProduce goods and services Sell produced goods and services

A firm may participate in one or more of these activities. Opportunity cost usually determines which ones

Virtual Firms

○ Perdue Chickens,

Profits – Different types

Accounting Profits = Total Revenue – Total CostExplicit, “visible costs”

Econ Profits =(Exp. + Implicit Rev) – (Exp. + Implicit Costs) Implicit revenue includes increases in asset value. Implicit costs involve opportunity costs.

E.g. Implicit Revenue Increase in real estate value E.g. Implicit Cost Salary you could have had

Try # 3 Page 291Costs Revenue

4,000 100,000

40,000

5,000

(50,000)

(4,000)

a.) Accounting Profit = 100,000-49,000 =

b.) Economic Profit = 100,000-103,000 =

$51,000

$-3,000

Real World Examples

NetflixDid not consider opportunity costs.

Mergers, SpinoffsChic-fil-a, PowerSchools, Netflix, Southwest and Airtran

Value-addedThe Value added by all firms must be 100%Image can add value. Medicine, Sports

equipment, coffee, designer clothes. Anything with a name brand really!

Short-Run vs. Long-Run

Long-run: Firms choose the least expensive method of production. All inputs are variable.

Short-run: Firsts adjust its long-run planning decisions as they get new information. Some inputs are fixed.

Demand vs. Supply

Quick Recap!Demand

○Individuals Maximize Utility

Supply○Firms Maximize profits

Production Tables and Graphs

Production Table- Shows the output form various FoP input combinations.

Total Product – Overall production output.

Marginal Product - Additional output per each additional worker.○ When MP=0 TP is maximized.

Average product – Output per worker.

Diminishing Marginal Productivity vs. Diminishing Marginal Utility

PART 2

Economies of Scope

T-shirts Sewing Shop, Tuxedos P & G, Amazon & ZAPPOS, ABC &

DISNEY & ESPN

Behavioral Side

(We are focusing on the standard model)

Social NormsWhat are people used to.What has always been doneLoyalty, Giving back, attention to customers.Other Examples

Behavioral Side Learning By Doing – Part of standard analysis

Will do better the next time.○ You will do better if you retake micro in college

Increase production by 1-2%My Uncle John…experience matters.

Output AnalysisNot just costs and output numbers“Think game theory”. It’s how we analyze not just

a model.Multi-dimensional

Tech Changes

Increased efficiency and new and better products are produced.

In the long run standard model, tech change is a given.

Moore’s law- computing costs are cut in half every 18 months. (Improvements keep the prices similar.)

Costs

Just like individuals companies often fail to look at costs from an economic standpoint. The focus on the accounting side.○ Depreciation – an assets decline in value over

time.

Firms like Google and other innovative companies are try to look at the bigger picture in terms of costs and payoffs.