Section_Four-Prod_Costs_08

Section_Four-Prod_Costs_08 - Section Four The Firm and...

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Unformatted text preview: Section Four The Firm and Production Costs, Short Term and Long Term • We’ve examined demand. Now we will look more closely at supply. • We will begin by looking at firms, and how business decisions are often made. • Decisions in a business setting are often made based on costs and revenues. • Let’s take a closer look… Terms • Explicit costs : costs for which an actual monetary payment is made. – Example: rent, supplies, electricity, distribution costs, etc. • Implicit costs : costs for which no monetary payment is made. It is the value of the resources used…what they could be earning if used in a different manner. – Example: the salary the owner could earn if working elsewhere; the money that could be earned by leasing out owned equipment or space; etc. Terms, continued • Total Revenue : the amount of money collected by selling product…determined by multiplying the number of units sold by the price of each unit sold. • Accounting Profit : the commonly held idea of profit…total revenue minus explicit (monetary) costs. • Economic Profit : the economists view of profit… total revenue minus both explicit and implicit costs. Terms, continued • Zero Economic Profit : When revenues are exactly equal to the sum of explicit and implicit costs. – Does not mean that company is making no money or doing badly…just means that the accounting profit (regular idea of profit) being made is equal to all implicit costs. – Also referred to as normal profit. • Zero Accounting Profit : bad deal…revenues just enough to cover explicit costs only. • Now let’s look more closely at how costs and revenues factor into decision making. • To do this, we have to realize that there are really two different types of decision making cycles. – Decisions pertaining to the short run. – Decisions pertaining to the long run. Long Run vs. Short Run important terminology… • SHORT RUN – – Decision making in the short term. – Because we are dealing with a short period of time, the firm must consider some aspects of its production to be fixed or unalterable. There is not enough time to plan for, pay for, or make major changes to the business such as building location, overall size of production, production process, major technology or equipment, product line, etc. – Some major production inputs, then, must be considered fixed. Be sure you understand the distinction… • LONG RUN – – Decision making for the long term. – In this situation, a firm can change any aspect of its production…there is enough time to develop a plan and acquire resources necessary for any change. – all production inputs are variable (can be changed). • We will begin by looking at decision making in the short run....
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Section_Four-Prod_Costs_08 - Section Four The Firm and...

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