Intermediate Microeconomics Theory - Final Cheat Sheet | ECON 306, Study notes of Microeconomics

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Production Function indicates the highest output q that a firm can produce for every specified combination of inputs. Q = F ( K, L ) The firm maximizes when MR=MC. MR is equivalent to price per unit. AC is equivalent to cost per unit Long –Run Production Function
The marginal product of capital is MPK = Q/K
The marginal product of labor is MPL = Q/L MPL is at a max at SRMC’s lowest point!
The change in output when K and L change is differential:  Q = (MPK)( K) + (MPL)( L)
ISOQUANT -Marginal Rate of Technical Substitution – is the slope of the isoquant, or the amount by which one input can be reduced when one extra unit of another input is used so that output remains the same. = -K / L or = (capital input)/ (labor input)
Short-Run Cost C = wL(Q)
Marginal Cost: C/Q or w/MPL where ‘w’ is the cost per unit of extra labor  Ex) the MPL is 3 and the wage rate is $30/hour. So 1 hr of labor increases output by 3 units. Each unit will cost 1/3 of the $30, so they each cost $10  Average Cost: TC/Q or w/APL  The firm fails to cover its operating costs at point where MC<AVC Long-Run Cost: difficulty in finding both: right combo of K and L, and maximum output for a given level of cost.  The Isocost Line graphs all possible combos of labor and capital that can be purchased for a given total cost.  The cost of capital is given by r = depreciation rate  + interest rate This is an isocost line  C=wL +rK Or it can be written as: K = C/r – (w/r)L
Profit Maximization (Q) = R(Q) – C(Q). Profit is maximized at Q where Rev-Cost is at its highest. This is where MR = MC Perfect Competition each firm is SMALL relative to the market. products are homogeneous or perfectly substitutable with one another in the market. Price taking firms have Free entry and exit. REVENUE FUNCTION: MR(Q) = P and AR(Q) = P  The demand of an individual firm is perfectly elastic     On this curve, MR, AR, and Price are equal  The profit-max’ing firm should choose output so that MC(q) = Price = MC
 doesn’t always earn a profit in the SR. When P<ATC, the firm is operating at a SR loss. It still produces tho to cover FC. Will shut-down when P<AVC. Long Run Competitive Equilibrium The formula for economic profit is  = R – wL – rK
LR equilibrium occurs where LMC = LAC. At this point each firm earns no profit and there is no incentive to entry/exit Constant-Cost Industry The LR sc for a constant-cost industry is a horizontal line at a Price that is equal to the LR minimum average cost of production Increasing-Cost Industry The LR sc for an increasing-cost industry is sloping upward Decreasing-Cost IndustryThe LR sc for decreasing-cost industry is sloping downward Chapter 9?
MONOPOLY Revenue is equal to the market demand curve. When MR is a positive value, revenue is increasing with quantity
A monopoly charges a price that exceeds marginal cost by an amount that depends inversely on the elasticity of demand Profit-maximizing price = When demand is extremely elastic, there is not much benefit to the monopolist Monopolist will never produce when elasticity of demand is less than | 1 |
When MR = 0, point elasticity of demand = 1
TAX- When a “per-unit” tax is levied… its optimal production is at MR = MC + t
Factor Market Inputs What determines Wages? Supply and demand for labor What determines the Supply and Demand for labor? Demand comes from the production function via marginal product pricing. When labor is the only input, the optimal demand for labor is equal to the profit-maximizing level of output Supply is determined from the utility-maximizing choice btw work & non-market uses of time