101chapter6 - Chapter 6: Production and Costs Chapter 6:...

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Unformatted text preview: Chapter 6: Production and Costs Chapter 6: Production and Costs • economic costs & profits • short run • long run big picture big picture • understand behavior of firm • understand & measure production costs I. economic costs & profits I. economic costs & profits • firm’s goal: maximize profit • look at factors that affect firm’s decision economic costs economic costs • opportunity cost of resources used • explicit costs paid in money wages, rent, material, etc. • implicit costs opportunity cost of resources used example: smoothie shop example: smoothie shop • explicit costs: wages interest on loan rent on store fruit, blenders • implicit costs forgone interest on funds used to buy capital owner’s forgone wages owner’s forgone profit from other venture accounting profit accounting profit • total revenue – explicit costs • ignores opportunity cost economic profit economic profit • includes opp. costs = total revenue - total costs = (price)(quantity)- (explicit + implicit costs) normal profit normal profit • occurs when • amount of accounting profit = opportunity costs of resources • if earning a normal profit, economic profit = 0 Short Run vs. Long Run Short Run vs. Long Run • Short Run (SR) time frame where some resources are fixed-- plants, equipment some inputs variable-- labor SR decisions are reversible •...
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This document was uploaded on 06/18/2011.

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101chapter6 - Chapter 6: Production and Costs Chapter 6:...

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