Week 4

• in competitive markets, firms are price takers
• in competitive markets, Marginal Revenue equals Marginal Cost
• in competitive markets, the price of the good is equal to the marginal cost
• when calculating competitive market equilibrium, the second order condition of marginal cost must also be fulfilled, as the first order derivation will give both maximum and minimum profits
• when calculating the competitive market equilibrium, it is also important to compare the operating profit (py - c(y) - F) with the fixed cost (F) to ensure it is more profitable to operate than not
• in a competitive market, a firm should operate when price covers average variable cost
• Average cost is the total cost divided by output
• Marginal cost is the change in cost due to change in output
• marginal cost is the first derivative of the cost function with respect to output
• marginal cost cuts average cost from below, and goes through the minimum point of average cost
• the cost minimisation problem is the way firms minimise cost to produce a given level of output
• the cost minimisation is solved by picking a level of input that minimises cost of producing a specific output level
• the cost minimisation solution is found when the slope of the [[Isoquant]] is equal to the slope of the isocost
• the cost minimisation solution is when TRS = - MP1/MP2 = -w1/w2
• Inputs are factors of production
• inputs are what is put into a function to get output
• isoquants are all combinations of inputs that produce a constant level of output
• isoquants are a bit like the producers indifference curve
• the shape of an isoquant is given by [[Technology]]
• isoquants have the same shapes as indifference curves for Cobb-Douglas, perfect substitutes, and perfect complement, and this is determined by technology
• production sets are combinations of inputs and outputs that are feasible patterns of production
• fixed proportions is a type of production function
• profit = revenue - cost
• Long Run profit maximisation is done when all factors of production (inputs) are varied
• Short Run profit maximisation is done when some factors of production (inputs) are fixed
• Some factors of production are fixed in the short run because they take time to change
• Once profit maximisation is complete, and you have the firms choice, you can solve for society's general equilibrium
• the supply curve is the upward-sloping part of the MC curve that lies above the average variable cost curve
• The Technical Rate of Substitution is the slope of the [[Isoquant]]
• the optimal solution is when the Technical rate of substitution is equal to the gradient of the isocost line
• technology is a way of production, and changes inputs into output
• a firm faces the technological constraint of what patterns of inputs and outputs are feasible