MANAGERIAL

ECONOMICS
SESH 1
ECONOMICS
• It is a study of how societies,
governments, businesses, households
and individuals allocate their scarce
resources.
• It is a social science that studies the
production, distribution and
consumption of goods and services.
• The study of how individuals and
societies make decisions about ways to
use scarce resources to fulfill wants and
needs.
• Assists individuals and societies in
making proper choices– that is, the
allocation and utilization of economic
resources, with the end view of
satisfying human wants and needs for
goods and services
• Simply scarcity and choice
• Greek word “Oikos” meaning household
• “nomus”- system of management
• Oikonomia or oikonomus mean
household management
HISTORY OF ECONOMICS
• CLASSICAL ECONOMICS- occurred
during the mid-1700s and 1800s
• Adam Smith- regarded as the father of
Economics. His book “Wealth of the
Nations”, became known as” bible in
economics” for a hundered years.
• Adam Smith’s major contributions was
his analysis of the relationship between
consumers and producers through
demand and supply, which ultimately
explained how the market works
through the invisible hand.
• John Stuart Mill- developed the basic
analysis of the political economy or the
importance of a state in the national is
much influenced by the conditions
brought by industrial revolution upon
the working classes economy.
• Karl Marx- a German,
NEOCLASSICAL ECONOMICS
• Believed to have transpired around the
year 1870.
• Its main concern was market system
efficiencies.
• Leon Walras- introduced the general
economic system. Also developed the
analysis of equilibrium in several
markets.
• Alfred Marshall- most influential
economist because of his book
“Principles of Economics”. He
developed the analysis of equilibrium of
a particular market and the concept of
“marginalism”.
• JOHN MAYNARD KEYNES- an
English Economist, offered an
explanation of mass unemployment and
suggestions for government policy to
cure unemployment in his influential
book: “The General Theory of
Employment, Interest and Money”.
NON-WALRASIAN ECONOMICS (1939)
• John Hicks-was recognized for his
analysis of the IS-LM model, an
important macroeconomic model.
• IS refers to the goods market for a given
interest rate
• LM means money market for a given
value of aggregate output or income
POST-KEYNESIAN ECONOMICS (1940
and 1950’s)
• Saw the development of the rules and
regulations of different private and
public institutions
• Introduced major post-Keynesian
neoclassical economists like Paul A.
 Samuelson, Kenneth Arrow,
Tobin and many more.
NEW CLASSICAL ECONOMICS
• APPLICABLE TO CONCERNS OF
DEVELOPING COUNTRIES, AND
WAS LARGELY AN OUTCOME OF
CONCERN FOR THE GROWTH OF
DEVELOPED COUNTRIES.
James • Unlimited wants and needs but scarce
resources
• The heart of the study of economics
LAW OF SCARCITY
• It states that goods are scarce because
there are not enough resources to
produce all the goods that the people
want to consume.

POSITIVE ECONOMICS Production

• An economic analysis that considers • Formation or creation of firms of an
economic conditions as” they are”, or output; conversion of inputs into outputs
considers economics” as it is”
• Uses objective or scientific explanation CAPITAL GOODS VS CONSUMER
in analyzing the different transactions in GOODS
the economy • CAPITAL GOODS- are used to make
• It simply answers the question “What it other goods
is?” • CONSUMER GOODS- final products
• Example: The economy is experiencing that are purchased directly by the
a slowdown because of too much consumers
politicking and corruption in the
government CHANGES IN PRODUCTION
• SPECIALIZATION- dividing up
NORMATIVE ECONOMICS production so that goods are produced
• Economic analysis which judges efficiently
economic conditions” as it should be” • DIVISION OF LABOR- different
• Concerned with the human welfare people perform different jobs to achieve
• Deals with ethics, personal value greater efficiency
judgements and obligations analyzing • CONSUMPTION- how much the
economic phenomena consumer buys
• It answers the questions “what should
be” Distribution
• Referred to as policy economics because • Process of allocating or apportioning
it deals with the formulation of policies scarce resources to be utilized by the
to regulate economic activities
household, business sector and the rest
• Example: The Philippine government of the world
should initiate political reforms in order
to regain investor confidence, and
Consumption
consequently uplift the economy.
• Direct utilization or usage of the
available goods and services by the
What is scarcity? buyer or the consumer
• Scarcity happens when a commodity or
service fall short in supply
FACTORS OF PRODUCTION
 • Land-all natural resources which are
given by and found in nature
• Labor-any human effort exerted in the
production of goods and services
• Capital-manmade goods used in the
production of other goods and services
• Entrepreneur-a person who organizes,
manages and assumes the risk of a firm
Because ALL resources, good, and services are
limited, WE MUST MAKE CHOICES
WHY CHOICES?
• We make choices about how we spend
our money, time, and energy so we can
fulfill our needs and wants.
• Needs-things that we need to survive
• Wants- things we would really like to
have
TRADE-OFFS
• YOU CAN’T HAVE IT ALL so you
have to choose how to spend your
money, and other resources. These
decisions involve picking one thing over
all other possibilities.
OPPORTUNITY COST
• It is a special kind of trade off
• The value of the next best choice
• Example: Sleeping is the opportunity
cost of studying for a test
Commodities
• They are the things produced and may
be divided into goods and services.
Four basic questions in economics
• What to produce?
• How to produce? (labor-intensive vs
capital intensive)
• For whom to produce?
• How much to produce? (Shortages vs
surplus)
TWO DIVISIONS OF ECONOMICS
• MICROECONOMICS – Branch of
economics which studies the economic
behavior of individual economic unit
which may be a person, a particular
household, a firm or an industry.
• Needs- something we need to survive
• Wants-not necessary but we desire or
wish for
• MACROECONOMICS – It does not
study individual units but all the units
combined together or the economy as a
whole. It studies national income,
national output, general price level, total
employment, total savings, total
investment, etc.
Difference between Microeconomics and
Macroeconomics
• Microeconomics deals with the analysis
of an individual unit and
Macroeconomics deal with the economy
as a whole.
• “In Microeconomics, we examine trees,
not the forest” —-Mc Connel
OTHER DEFINITIONS OF
MICROECONOMICS
• “Microeconomics is the study of
particular firm, particular households,
individual price, wage, income of the
industry and particular commodity”—
K.E. Boulding
• “Microeconomics consists of looking at
the economy through a microscope” —
A.P. Lerner
• Microeconomics tries to explain how an
entity or producers allocate its resources
among various needs as well as how
they can maximize the consumers’
satisfaction level while maximizing their
outputs.
 • Microeconomics also explains the
process of determination of individual
price with interaction to demand and
supply. It helps determine the price of
the product and factor inputs.
Roles of Economics
• To strengthen economic freedom
• Promote economic efficiency
• Promote economic stability
• To improve economic security
• Attaining a high level of growth in the
economy
Scientific Methods of Economics
• Data Gathering
• Economic Analysis
• Economic Conclusions
TYPE OF ECONOMIC SYSTEM
• Traditional Economy
• Command Economy
• Market Economy
• Socialism
• Mixed Economy
Other terms in Economics
• Exchange- the process of trading or
buying and selling of goods and services
for money and its equivalent
• Wealth- refers to any functional value
usually in money which can be traded
for goods and services
Other Terms in Economics
• Efficiency- refers to the productivity and
proper allocation of resources
• Effectiveness-means attainment of goals
and objectives
• Equity-justice or fairness
SESH 2
KEY MEASURES AND RELATIONSHIP
The Costs of Production
• The Market Forces of Supply and
Demand
– Supply and demand are the two
words that economists use most
often.
– Supply and demand are the
forces that make market
economies work.
– Modern microeconomics is
about supply, demand, and
market equilibrium.
WHAT ARE COSTS?
• According to the Law of Supply:
– Firms are willing to produce and
sell a greater quantity of a good
when the price of the good is
high.
– This results in a supply curve
that slopes upward.
• The Firm’s Objective
– The economic goal of the firm is
to maximize profits.
Total Revenue, Total Cost, and Profit
• Total Revenue
• The amount a firm receives for
the sale of its output.
• Total Cost
• The market value of the inputs a
firm uses in production.
• Profit is the firm’s total revenue minus
its total cost.
• Profit = Total revenue - Total cost
Costs as Opportunity Costs
• A firm’s cost of production includes all
the opportunity costs of making its
output of goods and services.
• Explicit and Implicit Costs
• A firm’s cost of production
includes explicit costs and
implicit costs.
 • Explicit costs are input
costs that require a
direct outlay of money
by the firm.
• Implicit costs are input
costs that do not require
an outlay of money by
the firm.
Economic Profit versus Accounting Profit
• Economists measure a firm’s economic
profit as total revenue minus total cost,
including both explicit and implicit
costs.
• Accountants measure the accounting
profit as the firm’s total revenue minus
only the firm’s explicit costs.
• When total revenue exceeds both
explicit and implicit costs, the firm earns
economic profit.
• Economic profit is smaller than
accounting profit.
PRODUCTION AND COSTS
• The Production Function
– The production function shows
the relationship between
quantity of inputs used to make
a good and the quantity of
output of that good.
The Production Function
• Marginal Product
• The marginal product of any
input in the production process
is the increase in output that
arises from an additional unit of
that input.
Table 1 A Production Function and Total
Cost: Hungry Helen’s Cookie Factory
• Diminishing marginal product is the
property whereby the marginal product
of an input declines as the quantity of
the input increases.
• Example: As more and more
workers are hired at a firm; each
additional worker contributes
less and less to production
because the firm has a limited
amount of equipment.
• Diminishing Marginal Product
• The slope of the production
function measures the marginal
product of an input, such as a
worker.
• When the marginal product
declines, the production
function becomes flatter.
From the Production Function to the Total-
Cost Curve
• The relationship between the quantity a
firm can produce and its costs
determines pricing decisions.
• The total-cost curve shows this
relationship graphically.
THE VARIOUS MEASURES OF COST
• Costs of production may be divided into
fixed costs and variable costs.
– Fixed costs are those costs that
do not vary with the quantity of
output produced.
– Variable costs are those costs
that do vary with the quantity of
output produced.
Fixed and Variable Costs
• Total Costs
• Total Fixed Costs (TFC)
• Total Variable Costs (TVC)
• Total Costs (TC)
• TC = TFC + TVC
Table 2 The Various Measures of Cost:
Thirsty Thelma’s Lemonade Stand
• Average Costs
• Average costs can
determined by dividing the
firm’s costs by the quantity of
output it produces.
• The average cost is the cost of
each typical unit of product.
• Average Costs
• Average Fixed Costs (AFC)
• Average Variable Costs (AVC)
• Average Total Costs (ATC)
• ATC = AFC + AVC
Average and Marginal Costs
Fixed cost FC
AFC = Quantity = Q
Variable cost VC
AVC = Quantity = Q
Total cost TC
ATC = Quantity = Q
• Marginal Cost
• Marginal cost (MC) measures
the increase in total cost that
arises from an extra unit of
production.
• Marginal cost helps answer the
following question:
• How much does it cost
to produce an additional
unit of output?
Cost Curves and Their Shapes
• Marginal cost rises with the amount of
output produced.
be • This reflects the property of
diminishing marginal product.
• The average total-cost curve is U-
shaped.
• At very low levels of output average
total cost is high because fixed cost is
spread over only a few units.
• Average total cost declines as output
increases.
• Average total cost starts rising because
average variable cost rises substantially.
• The bottom of the U-shaped ATC curve
occurs at the quantity that minimizes
average total cost. This quantity is
sometimes called the efficient scale of
the firm.
• Relationship between Marginal Cost and
Average Total Cost
• Whenever marginal cost is less
than average total cost, average
total cost is falling.
• Whenever marginal cost is
greater than average total cost,
average total cost is rising.
• Relationship between Marginal Cost and
Average Total Cost
 • The marginal-cost curve crosses
the average-total-cost curve at
the efficient scale.
• Efficient scale is the
quantity that minimizes
average total cost.
Typical Cost Curves
• It is now time to examine the
relationships that exist between the
different measures of cost.
• Three Important Properties of Cost
Curves
• Marginal cost eventually rises
with the quantity of output.
• The average-total-cost curve is
U-shaped.
• The marginal-cost curve crosses
the average-total-cost curve at
the minimum of average total
cost.
COSTS IN THE SHORT RUN AND IN THE
LONG RUN
• For many firms, the division of total
costs between fixed and variable costs
depends on the time horizon being
considered.
– In the short run, some costs are
fixed.
– In the long run, all fixed costs
become variable costs.
• Because many costs are fixed in the
short run but variable in the long run, a
firm’s long-run cost curves differ from
its short-run cost curves.
Economies and Diseconomies of Scale
• Economies of scale refer to the property
whereby long-run average total cost falls
as the quantity of output increases.
• Diseconomies of scale refer to the
property whereby long-run average total
cost rises as the quantity of output
increases.
• Constant returns to scale refer to the
property whereby long-run average total
cost stays the same as the quantity of
output increases.
SUMMARY
• The goal of firms is to maximize profit,
which equals total revenue minus total
cost.
• When analyzing a firm’s behavior, it is
important to include all the opportunity
costs of production.
• Some opportunity costs are explicit
while other opportunity costs are
implicit.
• A firm’s costs reflect its production
process.
• A typical firm’s production
function gets flatter as the
quantity 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 quantity
of output produced; variable
costs do change as the firm
alters quantity of output
produced.
• Average total cost is total cost divided
by the quantity of output.
• Marginal cost is the amount by which
total cost would rise if output were
increased by one unit.
• The marginal cost always rises with the
quantity 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 the
minimum of ATC.
• A firm’s costs often depend on the time
horizon being considered.
 • In particular, many costs are fixed in the
short run but variable in the long run.
• decrease. It means as more goods are
SESH 3
THE CONSUMER BEHAVIOR
THE CONCEPT OF CHOICE AND
UTILITY
• Utility- denotes satisfaction, a longer satisfied with the goods or
subjective pleasure that an individual
can derive from consuming a good or
service
• In economics, it explains how
individuals divide their limited
resources among commodities that
provide them satisfaction.
Utility
• Another word for “happiness”. How
happy and satisfied we are as
consumers.
• To measure utility, economists created a
unit of measurement called utils.
• Measures the value, or satisfaction
derived from economic activities
How to measure Utility?
• Cardinal- the satisfaction derived by the
consumers from the consumption of
goods or service can be measured
numerically
• Ordinal- states that satisfaction which a
consumer derives from the consumption
of product or service cannot be
measured numerically.
• Total Utility (TU)- the total satisfaction
received from consuming a given total
quantity of good or service
• Marginal Utility (MU)- the satisfaction
gained from consuming another quantity
of a good or service.
• Marginal utility measures how much
utility changes given one extra unit of
consumption
The Law of Diminishing Marginal Utility
• This theory states that as individual
consumes more units of commodity per
unit of time, his total utility increase
reaches its maximum and starts to
consumed, the extra satisfaction or
marginal utility received decreases.
Saturation Point
• The point where consumers are no
service they consume or avail and where
the Marginal Utility (MU) is equal to
zero
Declining Point
• The point or level of consumption
wherein the total utility or satisfaction
starts diminishing/declining
Utility Maximization Rule
• The maximization of satisfaction or
utility given a limited budget or income
Consumer Equilibrium
• The point where the last peso spent on
every good provided the same marginal
utility as the last peso spent on every
other good
SESH 4
Demand and Supply
Theories and Predictions
● We need to be able to predict the
consequences of
● alternative policies, and
● events that may be outside our
control
● The mental tool we use to make such
predictions is called a theory
● A theory is of no use if its predictions
are inaccurate
We need a theory of prices
● The theory of demand and supply is a
simple example of an economic theory
● It can be used to make predictions about
the price and quantity of some
commodity
 ● In a free-market economy, most
economic decisions are guided by prices
● Therefore, without a reliable theory of
prices, you will get nowhere in
economic analysis
Assume perfect competition
• The theory of supply and demand
assumes that commodities are traded in
perfectly competitive markets
• A perfectly competitive market is a
market in which
– there are many buyers
– many sellers
– and all sellers sell the exact
same product
• As a result, each buyer and seller have a
negligible impact on the market price
DEMAND
● Quantity demanded is the amount of a
good that buyers are willing and able to
purchase
● Demand is a full description of how the
quantity demanded changes as the price
of the good changes.
LAW ON DEMAND
● The law of demand states that
● the quantity demanded of a
good fall when the price of the
good rises, and vice versa,
provided all other factors that
affect buyers’ decisions are
unchanged
“Provided all other factors … are unchanged”
● That’s an important phrase in the
wording of the Law of Demand
● The quantity demanded of a consumer
goods such as ice cream depends on
● The price of ice cream
● The prices of related goods
● Consumers’ incomes
● Consumers’ tastes
● Consumers’ expectations about
future prices and incomes
● Number of buyers, etc.
● The Law of Demand says that the
quantity demanded of a good is
inversely related to its price, provided
all other factors are unchanged
Shifts in the Demand Curve
• Consumer Income
– As income increases the
demand for a normal good will
increase
– As income increases the demand
for an inferior good will
decrease
• Prices of Related Goods
– When a fall in the price of one
good reduces the demand for
another good, the two goods are
called substitutes
– When a fall in the price of one
good increase the demand for
another good, the two goods are
called complements
The Law of Demand—Explanations
● There are two ways to explain the Law
of Demand
● Substitution effect
● Income effect
Substitution Effect
● When the price of a good decreases,
consumers substitute that good instead
of other competing (substitute) goods
Income Effect
● A decrease in the price of a commodity
is essentially equivalent to an increase in
consumers’ income
● Consumers respond to a decrease in the
price of a commodity as they would to
an increase in income
● They increase their consumption of a
wide range of goods, including the good
that had a price decrease
SUPPLY
● Quantity supplied is the amount of a
good that sellers are willing and able to
sell
 ● Supply is a full description of how the
quantity supplied of a commodity
responds to changes in its price
LAW OF SUPPLY
● The law of supply states that, the
quantity supplied of a good rise when
the price of the good rises, as long as
all other factors that affect suppliers’
decisions are unchanged
Interaction of demand and supply
● We have seen what demand and supply
are
● We have seen why demand and supply
may shift
● Now it is time to say something about
how buyers and sellers collectively
determine the market outcome
● To do this, we assume equilibrium
EQUILIBRIUM
● We assume that the price will
automatically reach a level at which the
quantity demanded equals the quantity
supplied
Markets Not in Equilibrium
● Surplus
● When price exceeds equilibrium
price, then quantity supplied is
greater than quantity demanded
● There is excess supply
or a surplus
● Suppliers will lower the
price to increase sales,
thereby moving toward
equilibrium
● Shortage
● When price is less than
equilibrium price, then quantity
demanded exceeds the quantity
supplied
● There is excess demand
or a shortage
● Suppliers will raise the
price due to too many
buyers chasing too few
goods, thereby moving
toward equilibrium
● Law of supply and demand
● The price of any good adjusts to
bring the quantity supplied and
the quantity demanded for that
good into balance
Equilibrium: skepticism required
● Although the Law of Supply and
Demand is a good place to start the
discussion of prices, it should not be
taken to be the gospel truth.
● In some cases, the price might get stuck
at some other level and quantity
supplied and quantity demanded may
not be equal.
● Example: unemployment
Unemployment: a failure of equilibrium when
the wage is too high and stuck
Let’s make some predictions
● We can use our understanding of the
factors that shift the demand and supply
curves to predict the consequences of
● Alternative policy proposals,
and
● Events outside our control
SESH 4.1
CONSUMER BEHAVIOR AND UTILITY
MAXIMIZATION
CONSUMER- king in a capitalist or free
market economy; one who demands and
consumer goods and services
CONSUMER SOVEREIGNTY- power
to
determined what are to be produced
*According to Pass and Lowes, producers are
passive agents because the producers simply
obey the wishes, desires, needs and wants of the
consumer.
Active agents are the consumers since sila ang
nasusunod.
TYPES OF GOODS AND SERVICES
 1. Consumer goods – everything
that yields satisfaction to
consumers
2. Essential goods – these are necessity
goods; goods that satisfy the basic
needs of man
3. Luxury – goods for leisure
4. Economic – both useful and scarce; it
has vale attached to it and a price to
be paid for its use. Cheaper ones.
5. Free good – good that is abundant
and that there is enough of it to satisfy
everyone’s need without paying for it
FACTORS AFFECTING TASTES AND
PREFERENCES
1. age
2. income
3. education
4. gender
5. occupation
6. customs and traditions or culture
MASLOW’S HIERARCHY OF NEEDS
1. Physiological needs- basic needs for
sustaining human life itself; food,
water, warmth, shelter, sex and sleep
2. Safety needs- needs to be free f
danger and the fear of losing one’s
work, property, food, shelter
3. Social needs- needs cover the value of
the sense of belonginess, love, care,
acceptance and understanding of
family, friends, relatives and to be
accepted by others
4. Esteem needs- needs explain the
importance of self-esteem, recognition,
status and the general acceptance of;
an individual; power, prestige, status,
self confidence
5. Self-Actualization- explain the worth
of person’s development, growth,
realization and achievement
UTILITY THEORY
UTILITY- refers to the satisfaction or the
pleasure that an individual or the consumer gets
from consumption of goods and services that
he/she purchases
UTILS- measurement of utility
MARGINAL –means additional/extra
MARGINAL UTILITY- additional satisfaction
that an individual derives from consuming an
extra unit of good or service
TOTAL UTILITY- the total satisfaction that a
consumer derives from the consumption of a
given quantity of a good or service in a
particular time period
LAW OF DIMINISHING MARGINAL
UTILITY- states that as a consumer gets more
satisfaction in the long run, he experiences a
decline in his satisfaction of goods and services;
we consume more and more of a good or
service, we like it less and less, as we consumer
increasing amounts of a good or service, we
derive diminishing utility or satisfaction from
each additional unit consumed
HYPOTHETICAL UTILITY SCHEDULE
UNIT TOTAL MARGINAL
UTILITY UTILITY
1 40 40
2 90 50
3 170 80
4 270 100
5 350 80
Formula: MU= ∆TU = TU2-TU1
∆Q Q2-Q1
CONSUMER SURPLUS – measure of the
welfare we gain from the consumption of goods
and services; measure of the benefits that we
derive from exchange of goods
INDIFFERENCE CURVE- line that shows
combination of goods among which a consumer
is indifferent
HYPOTHETICAL TABLE FOR
CONSUMPTION OF MEAT AND
FISH
TOTALCOMBINATI
PRODUCT- refers MEA to thePtotal
OF output
FIS produced
P after utilizing the fixed and variable inputs in the
production process
ON MARGINAL T PRODUCT
MEA H OFOF AN INPUT-
extra output produced by an additional
(KG) T unit of
(K that input
FIS
G) H IL – input sub labor
A 5 500 1 100 MP= ∆TP = TP2-TP1
B 4 400 2 200 ∆I IL2-IL1
C 3 300 3 300
MARGINALD RATE 2 OF SUBSTITUTION-
200 4 400
HYPOTHETICAL PRODUCTION
rate at which a person will give up good y 500
E 1 100 5 to get
SCHEDULEOF T-SHIRTS
more of good x and vice versa
INPUT TP MP AP
BUDGET- purpose of which is not to spend 1 8 8 8
more than what you have 2 20 12 10
3 37 17 12
CHAPTER 5- PRODUCTION AND COST 4 57 20 14
5 72 15 14
PRODUCTION – refers to any economic 6 80 8 13
7 85 5 12
activity which leads to combination of four 8 88 3 11
factors; land, labor, capital and entrepreneurship 9 86 -2 10
to form an output that will give satisfaction to 10 82 -4 8
consumers; process of converting inputs into
outputs LAW OF DIMINSHING RETURNS- holds
TECHNOLOGY- body of knowledge applied that we will get less and less extra output when
to how goods are produced, production of we add additional doses of an input while
process employed by firms in creating goods holding other inputs fixed; the marginal product
and services of each unit will decline as the amount of that
a. labor intensive- more labor resources input increases, holding all other inputs constant
than capital resources; usually RETURNS TO SCALE
employed by economies where labor CONSTANT- indicates a case where a change
resources are cheap in all inputs leads to a proportional change in
b. capital intensive- utilizes more of output
capital resources than labor resources; INCREASING- economies of scale; happen
employed by industrialized economies when an increase in all inputs leads to a more
where capital resources are cheaper than than proportional increase in the level of
labor like Japan, US, Germany output DECREASING- hen a balanced
FIXED INPUT- any resource the quantity of increase in all inputs leads to a less than
which cannot be readily changed when market proportional increase in total output
condition indicates a change in output is COST-refers to all expenses incurred in the
desirable production process
VARIABLE INPUT- can be easily change in EXPLICIT- payments to non-owners of the
reaction to changes in the output level firm
 IMPLICIT-opportunity costs of using 0 0 0
resources owned by the firm 1 10 60 70 140 10 60 70
FIXED COST- overhead or supplementary 0 0 0 0
cost; those expenses which are spent for the use
of fixed factors of production; rents, interests, *FC divide Q
salaries, expenses on machine, depreciation AVC = VC divide Q
VARIABLE COSTS- prime or operating costs, ATC = TC divide Q or AFC plus AVC
expenses change as a consequence of a change
in quantity output produced
TOTAL FIXED COST- consists of costs that
do not vary as output varies and must be paid
even output is zero
TOTAL VARIABLE COSTS- costs that are
zero when output is zero and vary as output
decreases or increases
AVERAGE FIXED COST- total fixed cost
divided by the quantity of output produced
AVERAGE TOTAL COST- total cost divided
by the quantity of output produced
MARGINAL COST-cost of producing one
additional unit of output
MP= ∆TC = TC2-TC1
∆Q Q2-Q1
PRODUCTION SCHEDULE
Q FC VC TC M AFC AVC ATC
C *
0 10 0 10 - - - -
0 0
1 10 40 14 40 100 40 140
0 0
2 10 68 16 28 50 34 84
0 8
3 10 90 19 22 33 30 63
0 0
4 10 115 21 25 25 29 54
0 5
5 10 14 24 33 20 30 50
0 8 8
6 10 19 29 47 17 33 49/5
0 5 5 0
7 10 26 36 65 14 37 51
0 0 0
8 10 35 45 90 13 44 56/5
0 0 0 7
9 10 46 56 110 11 51 62