Chapter Outline - Ch.6 - The Supply Curve and The Behavior of Firms

Chapter Outline - Ch.6 - The Supply Curve and The Behavior of Firms

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Microeconomics – Chapter 6 Outline – 10/10/07 DEFINITION OF A FIRM Basic Economic Principle When Applied to the Behavior of Consumers When Applied to the Behavior of Firms People… Consumers… Firms… Make purposeful choices… Maximize utility… Maximize profits… With scarce resources… Subject ot a budget constraint Subject to a production function relating output to input Firm – An organization that produces goods or services. o Firm, company, and business are terms that are used interchangeably o Sole proprietorship – Firm with one owner o Partnerships – A few owners o Corporation – Managers are removed from the owners. A supply curve for a single firm tells us the quantity of a good that that firm will produce at different prices . Price-taker – Any firm that takes the market price as given; this firm cannot affect the market price because the market is competitive. o Although in principle an individual firm has the ability to set any price it wants, in reality a firm cannot charge a price far from the price that prevails in the market without soon losing all its customers. A market in which a single firm cannot affect the market price is called a competitive market . o When there are a lot of firms in the same market for a good or service, the market is competitive. A monopoly is a market in which there is only one firm. o Monopoly does not have a supply curve because the monopoly does not take the price as given. REVIEW There are a great variety of sizes and types of firms A market is competitive if no single firm can affect the market price In a competitive market with many firms, each firm is a price-taker The supply curve of a firm describes how the quantity produced depends on the price
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THE FIRM’S PROFITS Profits – The profits for any firms are defined as the total revenue received from selling the product minus the total costs of producing the product. That is, o Profits = total revenue – total costs o When profits are negative, the firms runs a loss o When profits are zero, the firm is breaking even We assume the firm maximizes profits Total Revenue Total revenue – Is the total number of dollars the firm receives from people who buy its product. o Total revenue = (Price * Quantity) [P * Q] o P is the price of the particular product the individual firm is selling o Q is the quantity Production and Costs Total costs – Are what the firm has to incur in order to produce on the product ( the sum of the variable costs and fixed costs ) o To emphasize that opportunity costs are included in total costs when computing profits, economists sometimes use the term economic profits rather than profits. Time Period.
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Chapter Outline - Ch.6 - The Supply Curve and The Behavior of Firms

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