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Exam III Review. Econ 101 – 1 Tuesday, November 28 th. Value of Total Product (VTP): VTP = Q*P = P*TP Value of Average Product (VAP): How much revenue does each person produce, on average? Value of Marginal Product (VMP) How much revenue does the last person hired produce?. The Short-Run. - PowerPoint PPT Presentation
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Sherman 1
Exam III Review
Econ 101 – 1Tuesday, November 28th
Sherman 2
The Short-Run
• Value of Total Product (VTP):– VTP = Q*P = P*TP
• Value of Average Product (VAP):– How much revenue does each person
produce, on average?• Value of Marginal Product (VMP)
– How much revenue does the last person hired produce?
Sherman 3
The Short-Run:AP
• How much average does each person produce, on average, when:– Labor = 1?– Labor = 2?– Labor = 3?
Labor TP AP VAP
1 80 ? ?
2 200 ? ?
3 270 ? ?
Sherman 4
The Short-Run:AP
• AP when:– L = 1:
• AP = TP/L• AP = 80/1• AP = 80
– L = 2:• AP = 200/2• AP = 100
– L = 3:• AP = 270/3• AP = 90
Labor TP AP VAP
1 80 80 ?
2 200 100 ?
3 270 90 ?
Sherman 5
The Short-Run:VAP
• Price = $3
• What is the VAP when:– Labor = 1?– L = 2?– L = 3?
Labor TP AP VAP
1 80 80 ?
2 200 100 ?
3 270 90 ?
Sherman 6
The Short-Run:VAP
• Price = $3
• VAP when:– L = 1
• VAP = AP*P• VAP = 80*3• VAP = $240
– L = 2• VAP = 100*3• VAP = $300
– L = 3• VAP = 90*3• VAP = $270
Labor TP AP VAP
1 80 80 240
2 200 100 300
3 270 90 270
Sherman 7
The Short-Run:Marginal Product
• How much more is produced with the addition of the:– 1st person?– 2nd person?– 3rd person?
Labor TP MP VMP
0 0 - -
1 80 ? ?
2 200 ? ?
3 270 ? ?
Sherman 8
The Short-Run:Marginal Product
• Marginal Product of:– 1st person
• MP1 = (TP1 – TP0)/ΔL
• MP1 = (80 – 0)/1
• MP1 = 80
– 2nd person• MP2 = (TP2 – TP1)/ΔL
• MP2 = (200 – 80)/1
• MP2 = 120
– 3rd person?• MP3 = (TP3 – TP2)/ΔL
• MP3 = (270 – 200)/1
• MP3 = 70
Labor TP MP VMP
0 0 - -
1 80 80 ?
2 200 120 ?
3 270 70 ?
Sherman 9
The Short-Run:Value of Marginal Product
• How much more revenue is produced with the addition of the:– 1st person?– 2nd person?– 3rd person?
Labor TP MP VMP
0 0 - -
1 80 80 ?
2 200 120 ?
3 270 70 ?
Sherman 10
The Short-Run:Value of Marginal Product
• Price = $3
• VMP when we add the:– 1st person
• VMP = MP*P• VMP = 80*3• VMP = $240
– 2nd person• VMP = 120*3• VMP = 360
– 3rd person• VMP = 70*3• VMP = $210
Labor TP MP VMP
0 0 - -
1 80 80 240
2 200 120 360
3 270 70 210
Sherman 11
The Short Run:Choosing Inputs
• What can the firm vary in the short run?- Capital: is it quick/easy/cheap to build new
buildings? buy machinery?- Labor: is it easy to hire/fire people in the short
run?• How does the firm decide how much labor
to use?
Sherman 12
The Short Run:Choosing Labor
• The firm will only hire if the last person pays for herself (VMP >= Wage)
• How does the firm decide how much labor to use?– VMP = cost of last
employee (wage)
• Where does this firm stop?
Labor TP VMP Wage
0 0 - 210
1 80 240 210
2 200 360 210
3 270 210 210
4 320 150 210
Sherman 13
The Short Run:Cost Curves and Revenue
• As quantity produced rises:– diminishing marginal returns
• “too many chefs in the kitchen spoil the broth”• gains to specialization decrease
– increasing marginal costs• Profit is maximized where P = MP
Sherman 14
The Short Run:Perfect Competition
• Individual firms and consumers cannot affect supply, demand, or price.
• Firms have identical products, information, and production technologies
• Free entry and exit
Sherman 15
Economic Profit
• Total Profit = Total Revenue – Total Cost
Π = TR – TC
(Q/Q)*Π = (TR – TC)*(Q/Q)
Π = (TR/Q – TC/Q)*Q
Π = (P*Q/Q – TC/Q)*Q
Π = (P – ATC)*Q
Sherman 16
The Short Run:Enter/Exit Decisions
• Is the economic profit here positive, negative, or zero?
P P
q Q
D
S
MC ATC
P0P0
1000100
Sherman 17
The Short Run:Enter/Exit Decisions
• Π > 0• Who will want to enter the market?• Who will want to exit?P P
q Q
D
S
MC ATC
P0P0
1000100
Sherman 18
The Short Run:Enter/Exit Decisions
• Set q where P = MC• Who will enter? exit?P P
q Q
D
S
MC ATC
P1P1
1000100
Sherman 19
The Short Run:Enter/Exit Decisions
• Π = 0• Who will want to enter the market?• Who will want to exit?P P
q Q
D
SMC ATC
PePe
qe Qe
Sherman 20
The Short Run:Enter/Exit Decisions
• Π = 0• This is the long-run equilibrium!• No one enters, no one exits.• P = MC = ATC
P P
q Q
D
SMC ATC
PePe
qe Qe
Sherman 21
The Long Run:Increasing Returns to Scale
P
Q
ATC0
P = ATC0
ATC1
P = ATC1
LRACRemember:
ATC = TC/Q
Sherman 22
The Long Run:Constant Returns to Scale
P
Q
ATC2 ATC3
P = ATC2,3
LRACRemember:
ATC = TC/Q
Sherman 23
The Long Run:Decreasing Returns to Scale
P
Q
ATC5P = ATC5
ATC4
P = ATC5
LRACRemember:
ATC = TC/Q
