Microeconomics

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    • Production
      Any economic activity that combines the four factors of production (land, labor, capital, and entrepreneurship) to create an output that directly satisfies customers
    • Production
      Converting inputs (such as raw materials, labor, and capital) into output (goods or services)
    • Technology
      The body of knowledge applied to how goods are produced
    • Technology
      The production processes employed by firms to create goods and services
    • Methods of Production
      • Labor Intensive
      • Capital Intensive
    • Labor Intensive
      • Requires a higher labor input compared to capital
      • Examples include agriculture, restaurants, hotels, and mining
      • Labor-intensive industries rely heavily on workers and require investment in training
      • Production often occurs on a small scale
    • Capital Intensive

      • Requires higher capital investment, including sophisticated machinery and equipment
      • Examples include oil refining, telecommunications, and airlines
      • Capital-intensive industries have higher barriers to entry due to equipment costs
    • Production Timeframes
      • Short Run
      • Long Run
    • Short Run
      A period with at least one fixed input (quantities of other inputs can vary)
    • Long Run
      A period where all inputs are considered variable
    • The distinction between short run and long run varies across industries
    • Inputs

      • Fixed Inputs
      • Variable Inputs
    • Fixed Inputs
      Resources whose quantity cannot readily change when market conditions indicate a desirable output change
    • Variable Inputs
      Economic resources whose quantity can easily change in response to output level changes
    • Production Function
      • Represents the functional relationship between input quantities and output produced
      • Specifies the maximum output achievable with a given quantity of inputs based on existing technology
    • Cost
      All expenses incurred during economic activity or the production of goods and services
    • Types of Costs
      • Explicit Costs
      • Implicit Costs
    • Explicit Costs
      Payments made to non-owners of a firm for their resources, such as labor or the use of a building
    • Implicit Costs

      Opportunity costs of using resources owned by the firm
    • Economic Profit
      • Calculated as total revenue minus total cost
      • Represents the true profit earned by a firm after considering both explicit and implicit costs
    • Sunk Costs
      Fixed costs that are already committed and cannot be recovered
    • Types of Costs
      • Fixed Cost
      • Variable Costs
      • Average Variable Costs (AVC)
      • Marginal Costs
      • Total Costs (TC)
      • Average Total Costs (ATC)
    • Fixed Cost
      • Costs that do not vary with different levels of production
      • Fixed costs exist even if the output is zero (e.g., rent or salaries)
    • Variable Costs
      • Costs that vary with the level of output
      • Examples include electricity costs, raw materials, and labor
    • Average Variable Costs (AVC)

      Calculated as variable costs divided by the quantity produced
    • Marginal Costs

      • The increase in cost caused by producing one more unit of the good
      • Helps firms make production decisions
    • Total Costs (TC)

      The sum of total fixed cost and total variable cost
    • Average Total Costs (ATC)
      • Calculated as total cost divided by the quantity produced
      • ATC considers both fixed and variable costs
    • Law of Diminishing Marginal Returns

      Predicts that after reaching an optimal level of capacity, adding more of a factor of production will lead to smaller increases in output
    • When all other production factors remain constant, adding additional units of a factor (e.g., labor) beyond the optimal level results in less efficient operations
    • Diminishing Marginal Utility
      Similar to how consuming more of a good yields diminishing satisfaction, adding more production factors eventually yields diminishing returns
    • Economies of Scale
      Contrasts with the law of diminishing returns; economies of scale occur when increasing production leads to cost savings
    • Early Economists
      • Jacques Turgot
      • Johann Heinrich von Thünen
      • Thomas Robert Malthus
      • David Ricardo
      • James Anderson
    • Turgot first mentioned diminishing returns in the mid-1700s
    • Classical Economists
      • Ricardo and Malthus linked diminishing returns to declining input quality
      • Ricardo called it the "intensive margin of cultivation"
      • He showed that adding labor and capital to fixed land yields smaller output increases over time
      • Malthus related it to population theory—population grows faster than food production due to diminishing returns
    • Neoclassical View

      • Neoclassical economists assume each labor unit is the same
      • Diminishing returns occur when adding more labor disrupts the production process with fixed capital
    • Diminishing Marginal Returns vs. Returns to Scale
      • Diminishing Marginal Returns: Short-term effect—adding input (like labor) while keeping one factor constant leads to smaller output increases
      • Returns to Scale: Long-term impact—increasing all production factors (labor, capital, etc.) affects overall output
      • Economies of Scale: Output grows faster than input increase (e.g., doubling input triples output)
    • Market Structure
      • Refers to the way businesses operate within an economic environment
      • Helps classify and understand different industries based on the level of competition they have
    • Factors Defining Market Structure
      • Barriers to Entry
      • Barriers to Exit
      • Product Differentiation
      • Number of Companies
      • Number of Customers
      • Product Prices
    • Types of Market Structures
      • Perfect Competition
      • Monopolistic Competition
      • Oligopoly
      • Monopoly
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