Microeconomics

• 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