Chapter 12 Notes

Chapter 12 Notes - [ChapterTwelve]...

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[Chapter Twelve]  Production and Cost Analysis I Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Differentiate economic profit from accounting profit. 2. Distinguish between long-run and short-run production. 3. State the law of diminishing marginal productivity. 4. Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs, given the appropriate information. 5. Distinguish the various kinds of cost curves and describe the relationships among them. 6. Explain why average cost curves are U-shaped. Chapter Outline Production and Cost Analysis I Markets channel individuals’ imagination, creativity, and drive into the production of material goods and services that other people want. Ultimately, all supply comes from individuals, who control the factors of production. Production: the “transformation of factors into goods and services.” Economists separate the supply of the factors of production from the supply of goods and services, so we can treat the prices of factors (for now) like they’re constant. The Role of the Firm Firm: “an economic institution that transforms factors of production into goods and services.” Firms organizing factors
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of production and/or produces goods and services and/or sells produced goods and services. Which combination a firm undertakes depends on the costs of each activity relative to the cost of letting another firm do it. Firms Maximize Profit Individuals maximize utility; firms maximize profit. Profit = Total revenue Total cost Accounting profit is explicit revenue less explicit cost. Economists include both explicit and implicit values. Economic profit is both implicit and explicit revenue less both explicit and implicit costs. Implicit costs include opportunity costs of the factors of production. Example: the earnings that the owner of the firm could have earned elsewhere. Total cost: “explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm.” Implicit revenues include the increase in the value of assets. Total Revenue: “the amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm.” Economic profit = (Explicit and implicit revenue) – (Explicit and implicit cost) The Production Process The Long Run and the Short Run In the long-run, a firm chooses the least expensive method of producing from among all possible methods. In the short-run, firms adjust their long-run planning decisions because of new information. Long-run Decision: a decision in which “a firm chooses among all
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Chapter 12 Notes - [ChapterTwelve]...

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