Single Input- Output Relationships

Key Cost Relationships The following cost derivations play a key role in decision-making: Marginal cost =  total cost ÷  output

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

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

Costs associated with levels of output Page 102 in booklet

Profit maximizing level of output, where MR=MC Profit maximizing level of output, where MR=MC P=MR=AR $ Page 102 in booklet

Average Profit = $17, or AR – ATC Average Profit = $17, or AR – ATC P=MR=AR $45-$28 $28 Page 102 in booklet

Grey area represents total economic profit if the price is $45… Grey area represents total economic profit if the price is $45… P=MR=AR 11.2  ($45 - $28) = $ Page 102 in booklet

Zero economic profit if price falls to P BE. Firm would only produce output O BE. AR-ATC=0 Zero economic profit if price falls to P BE. Firm would only produce output O BE. AR-ATC=0 P=MR=AR Page 102 in booklet

Economic losses if price falls to P SD. Firm would shut down below output O SD Economic losses if price falls to P SD. Firm would shut down below output O SD P=MR=AR Page 102 in booklet

Where is the firm’s supply curve? Where is the firm’s supply curve? P=MR=AR Page 102 in booklet

P=MR=AR Marginal cost curve above AVC curve? Marginal cost curve above AVC curve? Page 102 in booklet

Key Input Relationships The following input-related derivations also play a key role in decision-making: Marginal value = marginal physical product × price product

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

5 B C D E F G H I J Wage rate represents the MIC for labor Wage rate represents the MIC for labor Page 103 in booklet

5 B C D E F G H I J 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 MVP=MIC 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 MVP=MIC Page 103 in booklet

5 The area below the green lined MVP curve and above the green lined MIC curve represents cumulative net benefit. The area below the green lined MVP curve and above the green lined MIC curve represents cumulative net benefit. B C D E F G H I J Page 103 in booklet

5 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 MVP=MIC. B C D E F G H I J Page 103 in booklet

5 If you went beyond the point where MVP=MIC, you begin incurring losses. B C D E F G H I J Page 103 in booklet