Decisions that must be made by both consumers and producers. Producers must decide about inputs, production, sales, investments. Consumers must decide about consumption, and saving.

We must make these decisions because we cannot have everything we want. There are limited resources, but unlimited wants.

The government. The government may apply policies to certain activities. Example: butterfat quota in dairy production. Underly the market, regulations, laws, and legislation. Supply currency, grades, standards. Tries to lower the transaction costs as much as possible.

They may be capitalist, socialist, or mixed. This depends on many things such as history.

An institution style where there is a free market. People may own things and do whatever they want as long as they don't interfere with other people's right to own things and do what they want.

No countries are purely capitalist. All have some involvement by the government such as currency.

17th centuray pirate ships were purely capitalist.

A production system in which at least on of the inputs is fixed.

Short-run equilibrium is where marginal cost = marginal revenue. There will be profit or loss.

A production system in which there are no fixed inputs.

Equilibrium is where marginal cost = marginal revenue. There is no profit or loss.

Something a firm uses to make outputs. Could be ingredients, labour, capital, genetic stock, information, et cetera. Inputs could be factors of production; outputs from another firm. There can be many inputs for one output.

Inputs are either fixed or variable. Main categories of inputs are: land, labour, capital, and management.

Something a firm produces using inputs. Could be crops, manufactured goods, food, clothing, anything. One firm may produce multiple outputs, such as usable by-products.

Outputs are either conspumption goods or factors of production.

A relationship between inputs and outputs. Indicates a maximum output that can be produced. It is determined through experiments or by examining past records. This can be altered by a change in inputs or by a technology change. It is expressed using a table, a graph, and/or a mathematical equation.

Tables are good for getting exact information.

Graphs are good for visualizing the information.

Math equations are good for if there are more than one input factors.

y = f(x,z). Where y is output, x and z are the inputs, and f is the production function. The equation can be linear or quadratic.

When a new technology or production method is developed, production functions may change, since the previous production practices may no longer be the most efficient.

It can also effect consumption. The microwave changed what people want to buy.

The quantity of an output produced in a period of time at a given input. The total physcial product curve or short run production function is a graph of TPP.

You can graph TPP of 2 inputs by making a 3 D graph. Cutting the graph horizontally wil give you the 2 D graph of the parallel input at a fixed amount of perpendicular input.

A measure of outputs per inputs. 

APP = TPP / Inputs

Draw a line on the TPP curve between the point and the origin. The slope of this line is APP.

The change in output from a one unit change in input, as long as all other inputs stay the same.

MPP = ΔTPP / ΔInput

MPP is the derivative of TPP.

A set of input values in a production function where APP is increasing and MPP is greater than APP.

Each additional unit of input will increase productivity; output is increasing at an increasing rate. It is never good to be in Stage 1 because in this stage it is always better to increase inputs.

Stage 1 ends when APP = MPP.

A set of input values in a production function where APP is decreasing and MPP is below APP, but is still positive.

Output is increasing at a decreasing rate.

It is always good to be in Stage 2 because changing inputs may decrese efficiency.

Stage 2 ends when MPP = 0.

A set of input values in a production function where MPP is 0 or less.

Output is decreasing. It is always bad to be in Stage 3 because in this stage you can always do better by decreasing inputs. 

Horizontal contour lines on a TPP graph with 2 inputs (3D graph) where output is at a constant number. They can be made 2D by looking at the graph from above. In 2D isoquants are always downward sloping. If one input is fixed, it leaves only one point on the isoquant where production will be.

Producing at levels northeast off of the isoquant indicates an inefficient producer.

Where it crosses the iso-cost line is a possible production point. When the iso-cost is tangent to it, that is optimal production.

When two inputs are perfectly interchangable. Whether you use one or the other or a combination does not effect output. When price decreases for one input, it reduces the demand on the other input.

 The isoquants appear to be straight, downward sloping lines.

When two inputs must be applied in exact proportions. Having more of one than the other means you will have the output of that of the limiting input. When price decreases for one input, it reduces demand for the other input.

The isoquants are L shaped.

The amount of input that can be substituted for another input which maintaining a constant output. Or the rate at which a consumer can substitute two goods and be at the same utility.

MRTS = -ΔInput1 / ΔInput 2

Two inputs that are not perfect substitutes of each other, but are not perfect complements either.

The isoquants are downward sloping curved lines.

Allso called a budget. A line added to the isoquant diagram. It tells what combinations of the two outputs will add up to a constant cost. Its slope is the negative of the ratio of the input prices.

C = wL + rK

C = the budget

w = wage rate

L = amount of labour

r = price of capital

K = amount of capital

C, w, and r are fixed, so we get a 2 unknown equation (a line). If C increases, the isocost goes northeast. The slope of the line equals -w/r. If the price of an input changes, the slope changes.

Where it crosses the isoquant it is a possible production level. When it is tangent to the isoquant it is the most optimal point: cost is as low as possible for that isoquant.

MPP_L/w = MPP_K/r

L = labour

w = wage rates

K = capital

r = price of capital

The marginal product per dollar on one input is always equal to the marginal product per dollar on a second input.

Demands for inputs effect production when trying to achieve cost-minimal inputs. If you have a demand curve for the output, you have the demand curve for the inputs needed for that output.

The demand for an input can be determined by the optimal point on an isoquant/iso-cost diagram.

Technical change can alter it. Input demand increases with increased input use, increased input productivity, or decrease in price of substitute inputs or competing outputs.

The amount of fixed cost paid per unit of ouptut. Declines over the entire range of production since fixed outputs stay constant.

AFC = TFC / Output

The amount of variable cost per unit of output. U-shaped on a graph. In agriculture it can be more like an L shape. Firms need to be very large before average costs rise.

AVC = TVC / Output

The average total cost for every unit of output. It is average fixed and variable costs added together. Its minimum intersects with MC.

ATC = AFC + AVC.

or

ATC = (TFC + TVC) / Output

The increase in costs necessary to increase total output by one more unit. It intersects ATC at its minimum value.

MC = ΔTC / Δq

q = quantity of output

When the long-run average costs decrease as outputs expands. On the downward slope of the LRAC.

1. Physical reasons: it doesn't take twice as much more labour to run a farm twice as big.

2. Indivisibility of outputs: large firms can use larger more efficient equipment.

3. Specialization of effort: larger firms it can have more specialized labour.

4. Pecuniary factors: discounts on large volume inputs.

When the increase in costs is greater than the proportional increase in outputs. The upwards slope on the LRAC.

1. Operation encounters technical inefficiencies

2. Not enough management to handle the whole firm (this is why large corporations divide into smaller sections).

A tenet of economic analysis. We assume:

1. Goods produced by different firms are identicle

2. Firms can enter or exit the industry without cost

3. There is no risk or uncertainty

4. The price of the product is known

5. There are no costs to finding a buyer

6. The actions of other firms don't effect the firm

7. The actions of the firm doesn't effect the market; the firm is a price taker.

The returns generated by the firm.

TR = (product price)*(output level)

The revenue per unit of output. This is a constant equal to price for price-taking firms.

AR = TR/Output

The change in revenue from producing more output. The slope of TR.

MR = ΔTR/ΔOutput

The proportional change in supply in response to a change in price. Not to be confused with the slope of the supply curve. If you know the slop of the supply curve, price, and quantity, you can calculate ε.

ε = ΔQ / ΔP = (ΔQ*P) / (ΔP*Q)

The person who invented the Marshallian scissors and supply curves.

Came up with the equation

Q = -a + Pb; ceterus paribus

Q is used as the dependent variable in this equation but on a graph it should be the independent variable.

A horizontal supply curve. The price is fixed at a certain point, regarless of production.

ε = ∞

A shallow supply curve. A small change in price results in a big change in quantity. 

1 < ε < ∞

A steep supply curve. A big change in price results in a small change in quantity. This is frequently seen in agriculture.

0 < ε < 1

A verticle supply curve. No change in price can change the quantity.

ε = 0.

To add intermediate or fixed assets to a business. They need to be analysed because money is spent, and the effects are usually long-term. There are four kinds.

1. Replacing worn out or obsolete capital

2. Adopting new technology

3. Expansion

4 Adding new enterprises

A series of equal and periodic payments.

FV = PMT((1+i)ⁿ-1/i)

PV = PMT(1-(1+i)^-n/i)

To calculate future value when the present value is known. Depends on the present value, interest rate, and length of timet that passes. The oppostie of discounting.

FV = PV(1+i)ⁿ

Calculating present values when the future value is known. E.g., How much should I invest if I want X amount of money in X amount of years? The opposite of compounding.

PV = (FV)/((1+i)ⁿ)

The process of determining the profitability of an investment. Used when deciding what investments to make. Find out:

1. What are the returns?

2. Is it feasible in terms of cash flow?

Need to know:

1. Periodic net cash revenues

2. Initial cost

3. Terminal value

4. Interest rate

There are four kinds of investment analysis:

1. Payback period

2. Simple rate of return

3. Net present value

4. Iternal rate of return.

A form of investment analysis which looks at how long an investment would take to pay for itself. It is easy to use, shows what inestments have most immediate cash returns, but ignores cash flow after payback period, doesn't account for time value of money, and does not measure profitability.

P = I/E

P = payback period

I = initial cost

E = expected average annual net revenue.

A form of investment analysis which tells us the average net revenue as a percentage of the initial cost. It looks at an investment's earnings over the whole period, but fails to consider the size and timing of anual earnings, and doesn't consider the time value of money.

ROR = ((anual net cash revenue)-(average depreciation))/(investment)

The best form of investment analysis. If this value is greater than 0, this is a valid investment. It accounts for the time value of money, does not have misleading results, and considers inflation.

NPV = (P₁/(1+i)¹) + (P₂/(1+i)²) + ... -c

P = cash fow in year n

i = discount rate

c = initial cost

A number between 0 and 1, expressed as a percentage,  which indicates the likelihood that an outcome will occur.

P = (number of times the outcome occured last year)/(total number of possible times it could have happened)

The weighted average value of an investment based on two or more possible outcomes in a risky situation.

EV = P₁V₁ + P₂V_{2 ...}

P = probability of different outcomes

V = value of different outcomes

A measure of risk that uses Expected Value (EV).

Variance = P₁(V₁- EV)² + P₂(V₂ -EV)² ...

P = probability of different outcomes

V = value of different outcomes.

A weighted average of the utility from two or more possible outcomes.

EU = P₁U₁ + P₂U₂ ...

P = probability of different outcomes.

U = utility of different outcomes.

1. Don't do risky activities (gambling, lottery, leaving your house unlocked)

2. Obtain information on your decisions.

3. Diversify your investments, especially with negatively correlated things.

4. Get insurance.

The change in utility from one additional unit of a good or service. This value decreases and then goes negative.

MU = ΔUtility / ΔQuantity

Shows how demand for a good will change in response to a change in the good's price. Not the same as a slope coefficient.

η = Δ%Q / Δ%P

The amount of money a consumer has available to spend on goods and services. Expenditures are found by multiplying quantity by price of each good and adding them together.

It can be graphed as a straight line where combinations of two goods add up to the same budget. Where this line crosses the indifference curve, the consmer will consume that consumption bundle.

A good that you consume more of when your income rises. The Engel curve is upward sloping.

Income elasticity of demand is between 0 and 1.

A good that you consume less of when your income rises. The Engel curve is downward sloping.

Income elasticity of demand is less than zero.

Goods that can substitute each other. When the price of one goes up, the demand for the other goes up.

Cross-price elasticity is positive.

Goods that are used together. When the price of one goes up, the demand for the other goes down.

Cross-price elasticity is negative.

Goods that have no connection to each other. If the price of one goes up, the demand of the other in unaffected.

Cross-price elasticity is zero.

When own-price elasticity is greater than 1.

η > 1

When the own-price elasticity is equal to 1.

η = 1

When the own-price elasticity is less than 1.

η < 1

Given by the Engel Curve.

Income elasticity of demand = %ΔQuantity demanded / %Δ Income

Defined by:

1. Homogenous products (standards).

2. Freedom of entry and exit (no entry/exit costs).

3. Many buyers and sellers (no one firms actions can effect the entire market).

4. Perfect information (all buyers and sellers are fully informed on prices, quantities, and quality).

When two parties agree on a trade (usually of goods or services for money). Unless this can happen, no fair trade can occur.

Non-market goods are hard to trade.

The analysis of the impact of a change on the welbeing of various groups. 

Not to be confused with government payments to the poor.

This causes the government to intervene. Can occur when:

1. Markets not present (air, water, food safety)

2. Monopoly control (one firm with disproportionate power over the market)

3. People do not have full information (grades, standards, publications).

1. Support and protect a new industry

2. Curb the market power of potential monopolizers

3. Provide food security

4. Consumer health and safety (sanitary requirements, grades and standards, labelling requirements, health and nutrition recommendations, taxing bad things (tobacco, alcohol, junk food)).

5. Environmental protection

6. Accesible food (prices, food programs).

7. Development of rural communities

Consumer surplus plus producer surplus. The area of the triangle with sides of the Price axis, Demand curve, and Supply Curve.

A competitive market will reach the highest value for this.

-Cannot produce this good in a country, must import it.

-Regional price differences present a proffit opportunity.

Buying in a low-price market and then selling in a high-price market. If the transfer cost is more than the difference in price, arbitrage will not happen. At equilibrium transfer cost is equal to difference in price. The difference in price is not higher than transfer cost for very long.

Arbitrage raises price in the low-priced market, and lowers price in the high-priced market.

If barriers are low, firms in highly concentrated industries have little opportunity to set high prices.

-Absolute unit: when there is no level of output where the firm can operate competitively.

-Economies of scale: small firms face high costs, new firms need to be large to enter. 

-Capital access and costs: industries with large initial investment costs

-Preferential government policies: patents, copyrigts, import controls. 

Three aspects of supply/demand

1. Level of output in industry: larger volume = more profit opportunity for firms.

2. Responsiveness of supply/demand to price changes: more elastic demand = more opportunities for firms.

3. Proportion of food expenditures accounted for by the industry's product: smaller portion = growth will stagnate. 

1. Price competition

2 Monopolistic competition

3. Oligopoly

4. Monopoly

1. Pure competition

2. Monopsonistic competition

3. Oligopsony

4. Monopsony

Many sellers. Product is differentiated. Entry/exit is unrestricted. Some ability to set price. No excess profit. The more sellers, the less deadweight loss. 

Competition focuses on conditions of sale, advertisement, differentiation of products, brand reputation, location in store.

Few sellers. Product may be differentiated. Some ability to set price. There is excess profit. A firm's decisions are effected by the actions or anticipated actions of the competition. May enter price-cutting wars. Price is stable.

Exist because of product differentiation, high entry costs, dependence on long-term research/development, problems with access to markets, or aggressive corporate growth strategies. 

One seller. Product is unique. Exit/entry is completely restricted. There is excess profit. Produces where marginal cost = marginal revenue. There is deadweight loss. 

They exist because they may control a key input, have superior technology, more efficient by some nature of the industry, government action (hospitals), patents.

Charging different prices to different customers to maximize profits. Firm must have market power, consumers must be non-uniform in demand elasticity, the firm must be able to evaluate different demand elasticities, and the firm must be able to prevent resales. There is:

1. perfect price discrimination

2. quantity discrimination

3. mult-market price discrimination

The decision a firm makes when defining its vertical boundaries. Do we make this ourselves or do we hire another firm to make it?

Specialized firms will be more efficient, but buyers want to avoid being swindled by the other firm.

Good to buy because it can cause lower average costs. A vertically integrated firm will have a smaller size than a market firm, and will have difficulty adjusting to demand shifts.

Good to make, because you avoid transaction costs. Co-ordination of production is better. Keep private information safe.

Private costs plus external costs. 

Firms produce where private costs equal revenue, rather where social costs equal revenue. This creates a deadweight loss. 

When common property is overused because every individual is trying to maximize what they take from it.

Canbe solved by government regulation (taxes, entrance fee, restricted access), or property rights (convert into a commodity, auction it off).

When one party in a transaction knows a fact the other party does not. The informed party benefits at the expense of the non-informed party. Causes adverse selection and moral hazard.

A problem caused by asymmetric informaion when the informed party benefits because they know an unobserved characteristic that the uninformed party is unaware of. Example: buying life insurance and having an unhealthy lifestyle without the insurance company's knowledge.

Ways to prevent it:

Laws, screening, third party comparisons, standards, certifications, signaling by firm.

A problem caused by asymmetric information where the informed party undertakes an action the uninformed party is unaware of. Example: an employee not working hard, stealing, or taking very long breaks when the employer isn't watching.

Ways to avoid: contracts (fixed-fee, hire, and contingent), monitoring, bonding, deferred payments, efficiency wages.