Production Economy Notes
This is a sample of our (approximately) 4 page long Production Economy notes, which we sell as part of the Microeconomics Notes collection, a 1st Class package written at University Of Cambridge in 2010 that contains (approximately) 9 pages of notes across 3 different documents.
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Production Economy Revision
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Supervision 4: Firm Microeconomics, Paper 1, Part I Elisa Newby Essay What economic factors will determine whether a good that is technically feasible to
produce will be produced?
First of all, we assume that firms produce in order to maximise profits. If producing a
good does not yield a profit but a loss, the firm will shut down in the long run. Thus, a
good will only be produced if it yields nonnegative economic profits in the long run. Profit in turn is determined by revenues minus costs. Revenues are the price of a
good times its quantity. In the case of perfect competition, the price facing a producer
is constant, so the firm can sell any amount of output. Revenue increases
proportionally to the quantity of output. For a monopolist, the price he can charge
changes with quantity, because he faces a downwardsloping demand curve.
Therefore, there is an optimal level for revenue, which is the point where demand is
unitelastic. Costs are derived from the price of inputs and can be split into fixed costs and
variable costs. In the short run, fixed costs must be paid regardless of the amount of
output produced. Variable costs occur when output is produced. The marginal cost is
the cost of producing an additional unit of output. A firm will maximise its profits if it
produces up to the quantity where marginal cost equal marginal revenue. For a
perfectly competitive firm, this will happen when marginal cost equals the market
price. For a monopolist, this point is the intersection between the marginal cost curve
and the marginal revenue curve. In the long run, the firm will only produce output if it
can cover its costs, which means that the equilibrium price must equal or be greater
than average total cost. Average total cost is fixed cost plus variable cost divided by
the number of units produced. If the price is lower than average total cost, the firm
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