Chapter_9_short_version

Chapter_9_short_version - Production and Cost Analysis I...

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Production and Cost Analysis I Chapter 9
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Introduction In the supply process, people first offer their factors of production to the market. Then the factors are transformed by firms into goods that consumers want. Production is the name given to that transformation of factors into goods.
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The Role of the Firm The firm is an economic institution that transforms factors of production into consumer goods – it: Organizes factors of production. Produces goods and services. Sells produced goods and services.
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The Role of the Firm A virtual firm only organizes production. Virtual firms subcontract out all work. How an economy operates depends on Transaction costs – costs of undertaking trades through the market.
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Firms Maximize Profit Profit is the difference between total revenue and total cost. Profit = Revenue – Cost
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Firms Maximize Profit Economists and accountants measure profit differently. Accountants focus on explicit costs and revenue. Economists focus on both explicit and implicit costs and revenue.
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Firms Maximize Profit Economists define total revenue as the amount a firm receives for selling its good or service plus any increase in the value of the assets owned by firms. Economists define total cost as explicit payments to factors of production plus the opportunity cost to the owners of the firm.
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The Long Run and the Short Run The production process can be divided into the long run and the short run. A long-run decision is a decision in which the firm can choose among all possible production techniques. A short-run decision is one in which the firm is constrained in regard to what production decision it can make.
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The Long Run and the Short Run 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. In the long run, all inputs are variable. In the short run, some inputs are fixed.
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Production Functions A production table shows the output resulting from various combinations of factors of production or inputs. For this example, we are going to keep
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This note was uploaded on 08/04/2008 for the course ECON 1b taught by Professor Gescke during the Spring '08 term at Foothill College.

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Chapter_9_short_version - Production and Cost Analysis I...

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