Theory of the Firm Study Guide

Theory of the Firm Study Guide - Theory of the Firm...

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Theory of the Firm Concerns output and pricing decisions made by firms Centered on cost picture of firms and surrounding environment of competitive, cooperative and interventionist forces. Types of Costs: Fixed and Variable Decisions and actions are taken by people within the firms rather than the firms by themselves. Firm = organizes and rationalizes productive resources in order to supply a market. Ultimate goal = profit Fixed and variable costs Fixed costs = costs which do not change with the quantity of books sold (rent for office space, copying machines, maintenance and cleaning costs, insurance costs, printing machines, computers, other capital purchased to run the firm) Deprecation of capital/consumption rate of capital = fixed cost Variable costs vary with quantity produced Variable costs = number of additional costs (ink, paper, other raw material costs, additional labor, advertising) Distinction = fixed costs do NOT change with output levels, variable costs do. Fixed costs = not linked to the quantity of output produced. They are constant since they are incurred whether the firm produces or not. Variable costs are linked to quantity of output and are sometimes called ‘operating costs’. Variable costs increase as quantity produced increases.
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This note was uploaded on 04/19/2010 for the course ECON 1234 taught by Professor Me during the Spring '10 term at American University of Beirut.

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Theory of the Firm Study Guide - Theory of the Firm...

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