Econ chapter 9

Econ chapter 9 - Chapter 9 production and Cost Analysis I...

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Chapter 9 production and Cost Analysis I Production- name given to that transformation of factors into goods and services. -individuals control the factors of production. --- supply factors to market because they want something in return. -industries ability to supply goods depends on individuals willingness to supply the factors of production they control. The role of the firm- economic institution that transforms factors of production into goods and services 1. Organize factors of production and/or 2. Produce goods and services and/or 3. Sell produced good and services Which combination a firm will undertake depends on the cost of each activity relative to the cost of subcontracting the work out to another firm. -virtual firms- don’t produce anything- they simply subcontract out all production ex.- perdue Firms Maximize profit Profit= total revenue-total cost Total revenue- total sales * price -in determining what to include in total revenue and total costs, accountants focus on such explicit revenues and explicit costs. Accounting profit= explicit revenue- explicit cost Economic profit= implicit revenue and cost in determining profit. Implicit costs include the opportunity costs of the factors of production provided by the owners of the business.
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Total cost- explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm. Implicit costs must be estimated and aren’t directly measurable, accountants don’t include them. Include opportunity cost of time and capital provided by the owners of the firm. Implicit revenues include the increase in the value of assets owned by the firm. Total revenue- is the amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm. Production Process Long-run planning decision- firm chooses the least expensive method of producing. Firm chooses among all possible production techniques. Can vary inputs as much as it wants. . ALL INPUTS VARIABLE Short-run adjustment decision- firm adjust its long-run planning decision to reflect new information. Fewer options, the firm is constrained in regard to what production decisions it can make. Some inputs are so costly to adjust that they are treated as fixed. SOME INPUTS FIXED. Production table- table showing the output resulting from various combinations of
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Econ chapter 9 - Chapter 9 production and Cost Analysis I...

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