Notes 13 - Chapter 13 The Costs of Production o Purpose of this Chapter is start examining firms behavior Chapters 14 through 17 are all founded on this

Notes 13 - Chapter 13 The Costs of Production o Purpose of...

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1 Chapter 13: The Costs of Production o Purpose of this Chapter is start examining firm’s behavior. Chapters 14 through 17 are all founded on this chapter. This chapter introduces the costs of production and develops the firm’s cost curves. Market Structure Characteristic Perfect Competition Monopolistic Competition Oligopoly Monopoly Number of firms Many Many Few One Type of product Identical Differentiated Identical or differentiated Unique Ease of entry High High Low Entry blocked Examples of industries • Growing wheat • Growing apples • Clothing stores • Restaurants • Manufacturing computers • Manufacturing automobiles • First-class mail delivery • Tap water o Learning Objective: What are included in a firm’s costs of production? Link between a firm’s production process and its total costs. Meaning of ATC, MC and relationship. Shape of typical firm’s costs curves. Relationship between short run and long run. o Firm’s goal: Maximize Profit = Total revenue - Total cost Total revenue: Amount a firm receives for the sale of its output Total cost: Fully loaded costs or Market value of the inputs a firm uses in production o Firm’s Total cost or cost of production
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2 Include all costs including the opportunity costs of making its output of goods and services Explicit costs: Input costs that require an outlay of money by the firm o Examples are direct costs of production including labor, raw material, pencil, lights, cleaning bathrooms, etc. Implicit costs: Input costs that do not require an outlay of money by the firm o Examples are (i) full cost of using capital (physical, financial, human) (ii) cost of you the owner working at your own company since you can hire a manager and work somewhere else. This net can be positive. Cost of Physical Capital: If you need to go and purchase a machine, the alternative was leaving the money in the bank to get some interest. If you already own the machine, using the machine is the forgone rental income from leasing the machine. Cost of Human Capital: Cost of spending time to learn one skill is not spending the time to learn another skill. Ex: What is benefit and cost of becoming a MD over a lawyer? Cost of Financial Capital: Cost of using money that you could have earned interest on. o Generally ignored by accountants. In an income statement of a company the implicit cost of using PP&E is partially captured by accountants. What is not captured is the forgone profit from not renting. Also, they do not include the implicit cost or opportunity cost of the owner working at the company or the forgone lost interest income.
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  • Spring '14
  • DanielS.Kuo
  • Microeconomics, Economics of production, AFC, HO LEE JIN, HO LEE OCC, HO LEE MICROECONOMICS, HO LEE 2017

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