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Summary managerial economic b overview

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Course
Introduction to Economics

Institution
Katholieke Universiteit Leuven (KU Leuven)

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Uploaded on January 25, 2024
Number of pages 2
Written in 2022/2023
Type Summary

economics b
managerial economic b
economics
managerial economics
introduction to economics

Institution
Katholieke Universiteit Leuven (KU Leuven)
Education
European Studies
Course
Introduction to Economics

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Cato Sluyts

Introduc)on to economics B
slide summaries

Chapter 6: ﬁrms in compe77ve markets, part 1
• The goal of ﬁrms is to maximize proﬁt, which equals total revenue minus total cost.
• Some costs are explicit while others are implicit.
• When analyzing a ﬁrm’s behavior, it is important to include all the opportunity costs
of produc7on.
• A ﬁrm’s costs reﬂect its produc7on process.
• A typical ﬁrm’s produc)on func)on gets ﬂaHer as the quan7ty of input increases,
displaying the property of diminishing marginal product.
• A ﬁrm’s total costs are divided between ﬁxed and variable costs. Fixed costs do not
change when the ﬁrm alters the quan7ty of output produced; variable costs do
change as the ﬁrm alters quan7ty of output produced.
• Average total cost is total cost divided by the quan7ty of output.
• Marginal cost is the amount by which total cost would rise if output were increased
by one unit.
• The marginal cost eventually rises with the quan7ty of output.
• Average cost ﬁrst falls as output increases and then rises.
• The average total cost curve is U-shaped.
• The marginal cost curve always crosses the average total cost curve at its minimum.
• A ﬁrm’s costs oMen depend on the 7me horizon being considered.
• In par7cular, many costs are ﬁxed in the short run but variable in the long run.
• Constant returns to scale: when long run ATC stays the same as the quan7ty of
output changes
• Economies of scale: when long run ATC falls as the quan7ty of output increases
• Diseconomies of scale: when long run ATC rises as the quan7ty of output increases

Chapter 6: ﬁrms in compe77ve markets, part 2
• Because a compe77ve ﬁrm is a price taker, its revenue is propor7onal to the amount
of output it produces: TRi = P x qi
• The price of the good equals both the ﬁrm’s average revenue and its marginal
revenue: P = ARi = MRi
• To maximize proﬁt, a ﬁrm chooses the quan7ty of output such that marginal revenue
equals marginal cost, maximum proﬁt: qi for which MRi = MCi.
• For ﬁrms in compe))ve market, this is also the quan7ty at which price equals
marginal cost: maximum proﬁt: qi for which p = MCi.
• Therefore, the ﬁrm’s marginal cost curve is its supply curve that lies:
above AVC for the short-run supply curve
above ATC for the long-run supply curve.
• In the short run, when a ﬁrm cannot recover its ﬁxed costs, the ﬁrm will choose to
shut down temporarily if the price of the good is less than average variable cost
(P < AVC).
• In the long run, when the ﬁrm can recover both ﬁxed and variable costs, ﬁrm will exit
if the price is less than average total cost (P < ATC).

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