Chapter_6

Chapter_6 - Supply ProfitMaximization ProfitMaximization...

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Perfectly Competitive  Perfectly Competitive  Supply Supply
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Perfectly Competitive Firms Perfectly Competitive Firms
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Profit Maximization Profit Maximization Economists assume firms seek to  maximize profits Corresponds to buyers' utility maximizing goal Profit = total revenue - total cost Both explicit and implicit costs are included in  total cost
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Production Production factor of production : an input used in the  production of a good or service Examples: land, labor, capital, and entrepreneurship The  short run : the period of time when at least one  of the firm's factors of production is fixed.   Fixed factors of production  Variable factors of production The  long run : the period of time in which all inputs  are variable
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Production in the Short Run Production in the Short Run Consider a single product, bottles, and two  inputs, labor and capital Capital (bottle-making machines) is fixed.  Labor is variable. Determine the profit maximizing level of  output Change output by adjusting labor. 
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Production Production Workers  Bottles per  Day 0 0 1 80 2 200 3 260 4 300 5 330 6 350 7 362 The Law of Diminishing Returns: when  some factors of production are fixed,  the increase in production from one  additional unit of the variable factor will  eventually decrease. 
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Cost Concepts Cost Concepts Total cost  (TC): the sum of all payments for inputs.  It includes: Fixed cost: the sum of all payments for fixed  factors of production.  Variable cost: the sum of all payments for  variable factors of production.  Marginal cost  (MC): the change in total cost when  output increases by one unit. 
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Costs Costs Workers  Bottles per  Day 0 0 1 80 2 200 3 260 4 300 5 330 6 350 7 362 Marginal  Cost (/bottle) $0.15 0.10 0.20 0.30 0.40 0.60 1.00 Fixed  Costs  (/day) $40 40 40 40 40 40 40 40 Variable  Cost  (/day) $0 12 24 36 48 60 72 84 Total  Cost  (/day) $40 52 64 76 88 100 112 124
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Chapter_6 - Supply ProfitMaximization ProfitMaximization...

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