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Econmidtermguide - Chapter2 01:01 Thefirm FirmObjectives ,...

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Chapter 2 01:01 The firm Firm Objectives -Primary Objective of a manager of a firm is to maximize firm’s profits -Manager must sell the optimal amount of output, and the firm engages in efficient  production: No more output could be produce with existing tech, given the quantity of  inputs used Ownership and Control (3 major types of structures) -Sole Proprietorship (single owner) --Owner usually the operator --No agency problems --72 percent of businesses -Partnerships (Multiple owner) --Several owners, usually also operators --No agency problems -Corporation --companies whose capital is divided into shares that are held by individuals who have  only limited responsibility for the debts of the company --shareholders have limited liability (avoids risks, promotes entrepreneurship) --20 percent of firms, 87 percent of sales --Can take huge risks --Access to increased capital markets (can issue debt - notes)
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Cost Concepts -Sunk Costs - The portion of fixed costs that is not recoverable, and should not influence  any subsequent decisions -Avoidable Costs - Costs, including fixed costs that are not incurred if operations cease  are called avoidable costs. (e.g. cost of ending a lease early) -Fixed Costs (F) - an expense that does not vary w/ level of output,  -Variable Costs (VC) - costs that change with level of output, q.  VC(q) -Total costs (C) - sum of all fixed and variable costs: C=F+VC -Marginal Cost (MC) - addition to cost that results from producing one more unit of  output -Average Cost (AC) - is total cost divided by output: C(q)/q -Average Variable Cost (AVC): is variable cost divided by output: AVC=VC(q)/q -Average fixed cost (AFC) is fixed cost divided by output: AFC=F/q Geometry of Costs -When MC is below AVC, the AVC curve is falling.
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-When MC is above AVC, the AVC curve is rising. -When MC equals AVC, the AVC curve is at its minimum. -When MC is below AC, the AC curve is falling. -When MC is above AC, the AC curve is rising. -When MC equals AC, the AC curve is at its minimum. -As output increases, AFC approaches 0 and AVC and AC get close together Short run vs Long run -Short run: a time period so brief that some factors of production cannot be costlessly  varied -Fixed costs are sunk -Fixed number of firms -Firms are all identical (technology/behavior), they are price takers -There are n firms -Choose output where MC=P since they are price takers -Long run: a period of time long enough that all factors or production can be costlessly  varied -Firms are identical -Fixed costs aren’t sunk -Long run average costs is always at least as low as the short run average cost
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Economies of Scale
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