EC 201 10-6-08 - EC 201 Firm behavior o o 10-6-08 Assume...

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EC 201 10-6-08 Firm behavior o Assume that the firm’s goal is to maximize its profit o Total profit = (total revenue – total costs) Total revenue = P(price) * Q (sales) Depends of the degree of competition (market structure) Total costs o Time frames: short run long run o In the short run you can only vary output by altering the amount of labor and raw o In the long run you can change output by changing any or all of your inputs o Types of costs: variable costs – costs that vary as you change output Fixed costs – costs that are independent of output o In the short run labor costs are variable but capital costs are fixed o In the long run, all costs are variable Short Run- ultimate goal is to figure out how total cost varies with sales (Q) o Two key measures of cost 1. Average cost (AC) = (total cost/ Q) The cost, on average, of producing one unit of output (unit cost) It can be used to calculate profit
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EC 201 10-6-08 - EC 201 Firm behavior o o 10-6-08 Assume...

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