Econ112_Spr08_0303_030508

Econ112_Spr08_0303_030508 - Production and Costs Key...

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Production and Costs
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Key concepts Profit = Total Revenue - Total Cost Costs: explicit and implicit Profit: accounting vs. economic Resources: variable and fixed Short-run and long-run decisions Production functions: TP, AP, MP Diminishing MP Short-run costs: TC, ATC = AFC+AVC, MC
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Profit Profit = Total Revenue - Total Cost Π = TR - TC or Π = R - C R = Price x Quantity = PQ, but focus today will be on costs.
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Costs Explicit costs : wages, rent, interest, insurance, taxes, etc. Implicit costs : opportunity cost of firm-owned resources or owner-provided resources. Example 1 : owner of small business takes no salary, but her time is still a valuable resource and a cost of operating the business. Example 2 : a local contractor now owns his truck and no longer makes monthly loan payments. Should the resource cost of using this equipment suddenly drop to zero?
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Different notions of profit… • Accounting Profit ( Π A ): total revenue minus explicit costs: Π A = R - C E Economic Profit ( Π ): total revenue minus total costs (explicit and implicit): Π = R - C Π = R - (C E + C I ) Π = (R - C E ) - C I Π = Π A - C I ( Note: Π < Π A )
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Variable and Fixed Resources Variable resources can be varied in the short-run to affect the level of output. Fixed resources cannot be varied in the short-run. In the short run , at least one input is fixed. In the long-run , all inputs can be varied. Note that “short-run” and “long-run” will depend on the nature of the activity or technology.
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Short-Run Production Suppose we have 2 inputs: one fixed (K) and the other variable (L). As we add more L to the fixed input, output
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Econ112_Spr08_0303_030508 - Production and Costs Key...

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