Neas-Seminars

Module 5: Concepts and Overview


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By NEAS - 1/24/2005 12:27:14 PM


Microeconomics, Module 5: The Behavior of Firms

Reading: Landsburg, Chapter 5

(Outline for candidates: what to focus on and what the final exam will test)

(The attached PDF file has better formatting.)

Module 5 deals with the economic decision making of a firm.

●    Section 5.1 shows how the equimarginal principle compares benefits and costs.
●    Section 5.2 applies the principle to production and pricing scenarios.

Focus on the following topics:

Section 5.1: Marginal benefit is the additional benefit from the last unit of an economic activity; marginal cost is the additional cost for the last unit of that activity.

Equimarginal principle: An activity should be done up to the point where marginal cost equals marginal benefit, if marginal benefit is decreasing and marginal cost is increasing. We could generalize the definition as “if marginal cost is increasing faster or decreasing slower than marginal benefit.”

Section 5.2: To maximize profit, a firm produces where marginal cost equals marginal revenue. Changes in marginal cost or in demand change the price and quantity. Changes in fixed cost do not affect price or quantity unless they cause the firm to shut down.
By NEAS - 8/19/2018 8:18:02 PM

 
samuel - 4/16/2008 12:22:28 AM

Why is important that the producer have a monopoly? What changes if he does not?

[NEAS: If a firm has a monopoly, its costs (along with the market demand) determine its output. If it does not have a monopoly (oligopoly or a more complex scenario of firms with different costs), the profit maximizing output is harder to solve for.]