Nov 19, The Costs of Production

Nov 19, The Costs of Production - The Costs of Production...

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The Costs of Production Context and Purpose This lecture is the first lecture dealing with the firm behavior and the organization of industry . It develops the cost curves on which firm behavior is based. Can be utilized to develop firms behavior in a variety of market structures . We address the costs that underlie the supply curve . What are costs? The firm’s objective Total Revenue o The amount a firm receives for the sale of its output. Total Cost o The market value of the inputs a firm uses in production Profit is the firm’s total revenue minus its total cost. o Profit = Total revenue – Total cost Costs as Opportunity Costs A firm’s cost of production includes all the opportunity costs of making its output of goods and services. Explicit and Implicit Costs o A firm’s cost of production include explicit costs and implicit costs. o Explicit costs are input that require a direct outlay of money by the firm . o Implicit costs are input costs that do not require an outlay of money by the firm . Economic Profit vs. Accounting Profit Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs. Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. Example: The cost of capital as an opportunity cost
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Production and Costs The Production Function The production function shows the relationship between the quantity of inputs used to make a good and the quantity of output of that good. The
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This note was uploaded on 12/08/2009 for the course TEFLER ADM1300 taught by Professor Koppel during the Fall '09 term at University of Ottawa.

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Nov 19, The Costs of Production - The Costs of Production...

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