Econ study guide 2 - Econ study guide 2 Production theory:...

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Econ study guide 2 Production theory: Firms want to maximize profit. SHORT RUN Explicit costs are costs for inputs and other materials Implicit costs include opportunity cost, the cost of depreciation of machines, and costs incurred from the owners supplying goods. Opportunity cost in this case is the cost of shutting down compared to the cost of continuing to run the firm. Accounting costs are explicit costs and depreciation Economic costs are explicit costs, depreciation and opportunity costs. They are always greater than acct. costs. Economic costs are important for decision making Profit is the difference between Total Revenue and Total Costs . P=TR-TC Normal profit or a Normal rate of return is a zero economic profit. The firm is just covering opportunity costs. Fixed inputs do not change as output changes Variable inputs do change as output changes. The short run is a period of operation. There has to be some fixed inputs. The long run is a planning period. All inputs are variable. A production function measures the amount of output for a given combination of inputs . Q=f(L,K) The total product is the total amount of output a firm is producing given the number of inputs. Average product measures productivity. AP = Tp/L Marginal product measures the amount of extra output that comes from adding another worker. = MP TP L *Short run Production table The Law of Diminishing Marginal Returns states that as you continue to hire more variable input, the increase in output gets increasingly smaller and smaller.*total output doesn’t increase, the amount of change decreases. If this law didn’t exist, infinite output from finite products would be possible. Production Curves
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This note was uploaded on 09/08/2011 for the course ECON 2002 taught by Professor Kogut during the Spring '11 term at University of Louisiana at Monroe.

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Econ study guide 2 - Econ study guide 2 Production theory:...

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