2023Ch8SumMcBr - Supply: Costs of Production Chapter 8...

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Supply: Costs of Production Chapter 8
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Outline Firms and production Economic costs Economic profit Costs in relation to time periods Law of diminishing returns Short run costs Long run costs Economies and diseconomies of scale Minimum efficient scale
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Firms and production In microeconomics, a business enterprise or company is often times referred to as the business firm. Business firms may either be proprietorships, partnerships or corporations. All firms need resources in order to produce products (goods and services). They attempt to use land, labor and capital at the lowest cost possible in order to make the greatest profit possible. Profit is the difference between total revenue and total cost. The purpose of this chapter is to examine the various costs that are involved in production. Once you have an understanding of costs, you will be able to analyze the four product market models studied in microeconomics: perfect competition, monopoly, oligopoly and monopolistic competition.
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Economic costs Economic costs are the costs associated with the factors of production: labor, land, capital and entrepreneurship. Firms pay wages for labor, rent for land and interest for capital. These are referred to as explicit costs. Explicit costs are dollar outlays. But explicit costs are not the only type of costs in economics. Implicit costs are also included in the total cost of production. Implicit costs are based on the opportunity costs of the entrepreneur and refer to the minimum amount of profit it takes for the entrepreneur to stay in business. For example, if you worked for a corporation and received $50,000 and then went into business for yourself, you have to make at least $50,000, your opportunity cost, to make it all worth it.
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Economic profit The implicit cost of the entrepreneur (opportunity cost) is also is called normal profit. Thus, a portion of overall profit is a cost, the implicit cost (which is the normal profit) of doing business for the entrepreneur. In economics, the total cost of doing business is the sum of explicit and implicit costs. This is different than in an accounting class. In accounting, explicit costs are the only costs considered and the concept of profit would be total revenue minus those explicit costs. Economic profit, on the other hand, would be total revenue minus the sum of explicit and implicit costs, including normal profit.
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Economic time periods Economists analyze business firms in three different time periods: the immediate market period, the short run and the long run. The immediate market period is a time period so short that firms cannot make adjustments to increases or decreases in demand. The time period is too short to change the amount of resources used. In other words, all resources
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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2023Ch8SumMcBr - Supply: Costs of Production Chapter 8...

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