Firms, Profits, and Economic CostsConsumers mostly deal with small family-owned firms in neighborhoodsConsumers take advantage of the things producers provide voluntarily in the market, but entrepreneurs in the pursuit of profits is who meets our needsFirmsEconomic institution that transforms inputs into outputsFirms evolve into corporations of considerable sizeThe process of producing goods makes numerous decisionsDetermine a market needWhat quantity of output to produce, how to produce, and what inputs to employWhere firms are located can determine the quantity and quality of resources availableEntrepreneursThe person who assumes the risk of raising the required capital, assembling workers and raw materials, producing the product, and offering it for saleEntrepreneurs are more risky and when the decision is important they are more impulsive and mentally flexibleRunning start up businessThree basic business structuresSole ProprietorshipOne owner who usually supervises the business70% of USMost basic formLocal restaurants, dry cleaning, and auto repair shopsEasy to establishLimited in ability to raise capitalOwner takes on all management responsibilitiesUnlimited liabilityPartnershipTwo or more ownersEstablished by signing a legal partnership documentEasier to raise capital and spread around the management responsibilitiesPartners are subject to unlimited liabilityDeath of partner ruins the partnershipCorporationsMany stockholdersEnhances growth and efficiencyPossess most of the legal rights of individualsAble to issue stock to raise capitalLiability of individual owners is limited to the amount they have invested in the stockThey can raise large amounts of capital because of the limited liabilityProfitsDifference between the total revenue and the total costTotal revenue is the amount of money a firm receives from the sales of its productsIt is equal to price per unit times the number of units soldTotal cost includes both out of pocket expenses and opportunity costsEconomic CostsSum of the explicit and implicit costsExplicit costs are those expenses paid directly to some other economic entityWages, lease payments, expenditures for raw materials, taxes, utilities…Sum of all the checks its writtenImplicit costs refer to all of the opportunity costs of using resources that belong to the firmDepreciation, depletion of business assets, opportunity costs of a firm’s capitalCapital investments is a big oneSunk CostsCosts that have already been incurred and cannot be recoveredBets, tuition, expenditures on advertisingFuture decisions should ignore themSunk costs are sunkEconomic and Normal ProfitsNormal rate of return on the capital invested in the firm is the return just sufficient to keep investors satisfied and sufficient to keep capital in the business over the long runIf a firms rate of return falls below this rate investors will put their capital to use elsewhere and the firm will die outFirm is earning economic profits if it is generating profits in excess of zero once implicit costs are factored inAnything about zero economic profits represents a true economic profit and anything below is an economic lossNormal profits are the profits necessary to keep a firm in business over an extended period of time, or over the long runShort run vs. long runDefined by the firms ability to adjust the quantities of various resources they are employingShort RunPeriod of time over which at least one factor of production is fixed and cannot be changedLong RunPeriod of time sufficient for a firm to adjust all factors of productionTime required varies for the industryFirms seek economic profits and determine profits by first calculating their costs and the costs may look different over short run vs. long runProduction in Short RunFirms can produce output in the short run only by altering the amount of labor they employMarginal ProductChange in the output that results from a change in the labor inputAverage ProductOutput per worker is found by dividing total output by the number of workers employed to produce that outputIncreasing and Decreasing Marginal ReturnsWhen average and marginal product are both rising it is called increasing marginal returnsDiminishing marginal utility is when each additional worker adds to the total output but at a diminishing rateShort Run costsProduction costs are determined by the productivity of workersProduction periods are split over long and short runIn the short run at least one factor is fixedFixed and Variable costsFixed costsThose that do not change a firm’s output expands or contractsExamples are rent or lease payments, administrative overhead, insuranceThe don’t rise or fall as a firm alters production to meet market demandsVariable costsDo fluctuate as output changesExamples are labor and material costsTotal costs= fixed costs + variable costsAverage CostsCost per unit of outputFixed costs divided by output (FC/Q) is average fixed costsRepresents average amount of overhead for each unit of outputTotal variable costs divided by output (VC/Q) is average variable costsRepresents the labor and raw materials expenses that go into each unit of outputAFC + AVC = ATCMarginal CostChange in total cost arising from the production of additional units of outputEqual to the change in total cost divided by the change in outputSince fixed costs don’t change you can make the equation that change in total variable costs divided by the change in quantityAverage Fixed CostsAFC falls more continuously as more output is producedThis is because your overhead expenses are getting spread out over more and more units of outputAverage Variable CostsBowl-shapedAt relatively low outputs the curves slope downward, reflecting an increase in returns as average costs dropAs production levels rise, diminishing returns set in and average costs start to climb back upAverage Total CostsBowl-shapedAny point on the TC, TFC, and TVC can be found on their curves by multiplying the average cost at that point by the output producedMarginal CostIntersects the minimum points of both the AVC and the ATC curvesMarginal cost is necessary to produce another unit of a given product and when the cost to produce another unit is less than the average of the previous unit produced average costs will fallLong Run CostsFirms can adjust all factor inputs to meet the needs of the marketLong Run Average Total Cost (LRATC)Represents the lowest unit cost at which any specific output can be produced in the