ECO365 Week 2 Lecture Notes

ECO365 Week 2 Lecture Notes - Chapter 9 I Introduction A...

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Chapter 9 I. Introduction. A. The analysis of supply is more complicated than the analysis of demand. B. In the supply process, people first offer the factors of production they control to the market. C. Then the factors are transformed by firms into goods that consumers want. D. Production is the name given to that transformation of factors into goods. II. The role of the firm. A. A key concept in production is the firm. The firm is an economic institution that transforms factors of production into consumer goods. A firm (1) organizes factors of production, (2) produces goods and services, and (3) sells produced goods to individuals. B. When the firm only organizes production it is called a virtual firm. 1. Virtual firms subcontract out all work. 2. While most firms are not virtual, more and more of the organizational structure of business is being separated from the business. C. The firm operates within the market and, simultaneously, it is a negation of the market in the sense that it replaces the market with command and control. 1. Whether an activity is organized through the market depends on transaction costs— costs of undertaking trades through the market. 2. The various forms of business organization—sole proprietorships, partnerships, corporations, for-profit firm, nonprofit firms, and cooperatives—are the production organizations that translate factors of production into consumer goods. D. Firms maximize profit. 1. Profit is defined as: Profit = total revenue - total cost a. Total cost is explicit payments to factors of production plus the opportunity cost of the factors provided by the owners. b. Total revenue is the amount a firm receives for selling its good or service plus any increase in the value of the assets owned by firms. 2. Economists and accountants measure profit differently (Chapter Objective 1). a. For accountants, total revenue is total sales times price. And profit is explicit revenue less explicit cost. b. For economists, revenue includes any increase or decrease in the value of any assets the firm owns. They would count the implicit costs of the owners of business – or opportunity costs. Thus, their profit formula would read: economic profit = (explicit and implicit revenue – (explicit and implicit cost).
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III. The production process. A. The production process can be divided into the long run and the short run (Chapter Objective 2). 1. A long-run decision is a decision in which the firm can choose among all possible production techniques. 2. A short-run decision is one in which the firm is constrained in regard to what production decision it can make. 3. The terms long run and short run do not necessarily refer to specific periods of time—they refer to the degree of flexibility the firm has in changing the level of output.
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