Week 4 - 22.10.

2019 -
Production Costs and Perfect
Competition
Costs & Profits

The driving motivation behind business decisions is profit maximization

Total Revenue - Total Costs = Profits

Total Revenue - Total Explicit Costs + Total Implicit Costs) =

Profits

Quantity x Price = Total Revenue

Costs

Explicit costs

Payment to non-owners for supply of their resources (wages, rents,

bills)

Implicit costs

Opportunity cost of using owned resources (use of machines)

Short & Long Run

Short Run

A period of time where there is at least one fixed input Physical

Capital)

Costs

Total Fixed Costs + Total Variable Costs = Total Costs

Total Fixed Costs TFC - don't vary with output

Total Variable Costs TVC - vary as output changes

Long Run

A period of time when all inputs are variable Labor)

Week 4 - 22.10.2019 - Production Costs and Perfect Competition 1

 Costs

Long Run Average Costs LRAC

Marginal Cost vs Average Cost

MC < ATC, ATC is falling Average Total Cost)

MC > ATC, ATC is rising

MC = ATC, ATC is constant

Market Structure

Types

Perfect Competition

Monopoly

Traits

Number of firms

Ease of entry and exit in the market

Similarity of goods & services

When should you quit the market?

If the firm's revenue is lower than its costs

P < ATC Average Total Cost)

P > AVC Average Variable Cost)

The firm covers its TVC Total Variable Cost), therefore should stay
in the market in the short run.

Week 4 - 22.10.2019 - Production Costs and Perfect Competition 2