Chapter 13 - Chapter 13: The Costs of Production This...

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1 Chapter 13: The Costs of Production This chapter introduces you to the cost curves, which are the building blocks for models that determine production and pricing decisions made by firms attempting to maximize profits. 1.- Firms’ objective: The primary objective of all firms is to maximize: Profits = Total Revenue – Total Costs , Where: Total Revenue = P*Q, and Total Costs = the dollar figure paid to purchase inputs. There are two types of profits, depending on what types of costs are taken in consideration when computing total costs: 1. Accounting Profits = Total Revenue – Explicit Costs, where explicit costs represent out of pocket expenses. 2. Economic Profits = Total Revenue – (Explicit Costs + Implicit Costs), where implicit costs represent opportunity costs and measure forgone alternatives. Therefore: Accounting Profits Economic Profits . (Quiz #1 in your textbook) In what follows, we turn to examine the production function affecting total revenue and the cost functions of the firm in order to learn about the production and pricing decisions made by firms. 2.- The Production Function of the Firm and its Relationship to Costs: The more the firm wishes to produce, the more it will cost the firm to do so. Production Function
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This note was uploaded on 12/16/2010 for the course ECON 102 taught by Professor Clague during the Fall '08 term at San Diego State.

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Chapter 13 - Chapter 13: The Costs of Production This...

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