Chapter 20 part 1

Chapter 20 part 1 - Chapter 20 Costs and Supply of Goods...

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Chapter 20 Costs and Supply of Goods
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Production defined Production is the creation of value Activity that enhances the value of inputs in some way If processes create losses, then the activity would have to be considered consumption, not production For instance if recycling results in losses, then consumption of resources; or is a father employs a derelict son then engaging in consumption, not production Consumption is the extermination of value, correctly understood Savings : the surplus of production over consumption
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Short Run v. Long Run Short run (in production): a time period so short that a firm is unable to vary some of its inputs The firm’s plant size typically cannot be altered in the short run Hence, some costs are considered fixed Long run (in production): a time period long enough to allow the firm to vary all of its factors of production The industry has time to fully adjust to changes, including the plant size Rate of Return Equalization Principle – allow time to flow
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Categories of Costs To help describe the relationship between costs and the level of output in a typical production processes In the short run, two categories: fixed and variable Total fixed cost (TFC): total amount of mixed cost Average fixed cost: TCF/q (q=output) Total variable cost (TVC): total amount of variable cost Average variable cost (AVC): TVC/q Average total cost (ATC): TC/q or AVC + AFC Marginal cost (MC): ΔTC/Δq
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Market Coordination and Prosperity (visualizing market allocation) Businesses/producers incur costs by bidding for resources from households.
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Chapter 20 part 1 - Chapter 20 Costs and Supply of Goods...

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