FSU ECO 2023 - Chapter 13: Production and Cost

Unformatted text preview:

Chapter 13 Production and Cost 13 1 Economic Cost and Profit services 1 The Firms Goals Hire factors of production and organize them to produce and sell goods and a There is one fundamental goal maximize profit 2 Accounting Cost and Profit a Accountants measure cost and profit to ensure that the firm pays the correct amount of income tax and to show the bank how the firm has used its bank loan i Depreciation the fall in the value of the firm s capital calculated using the Internal Revenue Service s rules b Economists have a different purpose to predict the decisions that a firm makes to maximize its profit i Respond to opportunity cost and economic profit a To produce its output a firm employs factors of production Land Labor Capital 3 Opportunity Cost and Entrepreneurship goods or services i Another firm could have used these same resources to produce other 1 Construction workers who are building an office high rise can t simultaneously build apartments ii From the viewpoint of the firm this opportunity cost is the amount that the firm must pay the owners of the factors of production it employs to attract them from their best alternative use 1 Opportunity cost of production the cost of the factors of b Explicit Costs and Implicit Costs production it employs i The amount that a firm pays to attract resources from their best alternative use is either an explicit cost or an implicit cost 1 Explicit cost a cost paid in money because the amount spent could be spent on something else an explicit cost is an opportunity cost Implicit cost incurred when a firm uses a factor of production but it does not make a direct money payment for it normal profit a Economic depreciation the opportunity cost of the firm using capital that it owns i Measured as the change in the market value market price of the capital at the beginning of the period minus its market price at the end of the period b The cost of the resources of the firm s owner Interest is another cost of capital When the firm s owner provides the funds used to buy capital the opportunity of those funds is the interest income forgone by not using them in the best alternative way 2 3 4 Normal Profit is part of a firm s opportunity cost because it is the cost of a forgone alternative running another firm 4 Economic Profit a firms total revenue minus total cost a Total revenue the amount received from the sale of the product i The price of the output multiplied by the quantity sold b Total cost the sum of explicit costs and implicit costs and is the opportunity cost of production factors it uses SHORT RUN VS LONG RUN Short Run the time frame in which the quantities of some resources are fixed To increase output in the short run a firm must increase the quantity of variable Labor is usually the variable factor of production SR decisions are easily reversed A firm can increase or decrease output in the SR by increasing or decreasing the number of labor hour it hires Long Run the time frame in which the quantities of all resources can be varied LR is the perios in which the firm can change its plant To increase output in the LR a firm can increase the size of its plant LR decisions are not easily reversed Once a firm buys a new plant its resale value is much less than the amount the firm paid for it o Sunk cost the difference between the cost of the plant and its resale value irrelevant to the firm s decisions The only cost the influence the firm s decisions are the SR cost of changing its labor inputs and the LR cost of changing its plant 13 2 Short Run Production 1 Total Product TP the total quantity of a good produced in a given period a An output rate the number of units produced per unit of time b Increases as the quantity of labor employed increases 2 Marginal Product MP the change in total product that results from one unit increase in the quantity of labor employed a Tells us the contribution to total product of adding one additional worker b When the quantity of labor increases by more than one worker i MP Change in TP change in quantity of labor c The steeper the slope of the TP curve in part i The greater is MP in part ii When the TP curve turns downward in part iii MP is negative in part d Increasing Marginal Returns occur when the MP of an additional worker exceeds the MP of the previous worker i The source is increased specialization and greater division of labor in the production process ii Most production processes experience increasing marginal returns initially e Decreasing Marginal Returns occur when the MP of an additional worker is less than the MP of the previous worker i All production processes eventually reach this point ii Arise from the fact that more and more workers use the same equipment and work space As more workers are employed there is less and less that is productive for the additional worker to do iii Law of decreasing returns as a firm uses more of a variable factor of production with a given quantity of fixed factors of production the MP of the variable factor eventually decreases 3 Average Product AP the total product per worker employed a AP TP quantity of labor b Productivity c AP is largest when AP and MP are equal d MP curve cuts the AP curve at the point of maximum AP 13 3 Short Run Cost 1 Total Cost TC the cost of all the factors of production used by a firm a Divides into two parts i Total fixed cost TFC the cost of a firm s fixed factors of production land labor capital and entrepreurship ii Total variable cost TVC the cost of a firm s variable factor of production labor b TC TFC TVC 2 Marginal Cost the change in TC that results from a one unit increase in output a TVC and TC increase at a decreasing rate at small levels of output and then begin to increase at an increasing rate as output increases b Tells us how TC changes as output changes 3 Average Cost a Average fixed cost AFC is total fixed cost per unit output b Average variable cost AVC total variable cost per unit output c Average total cost ATC total cost per unit output i ATC AFC AVC 13 4 Long Run Cost 1 Plant Size and Cost a Economies of scale a condition in which when a firm increases its plant size and labor employed by the same percentage its output increases by a larger percentage and its ATC decreases i Specialization of Labor 1 ATP increases but ATC falls ii Specialization of Capital b Diseconomies of scale a condition in which when a firm increases its plant size and labor employed by the same percentage …


View Full Document

FSU ECO 2023 - Chapter 13: Production and Cost

Documents in this Course
EXAM 2

EXAM 2

35 pages

Exam 3

Exam 3

18 pages

EXAM 2

EXAM 2

35 pages

Exam

Exam

9 pages

Chapter 1

Chapter 1

10 pages

Exam 1

Exam 1

14 pages

Exam 3

Exam 3

9 pages

Chapter 1

Chapter 1

24 pages

Exam 1

Exam 1

8 pages

Exam 1

Exam 1

19 pages

MIDTERM 1

MIDTERM 1

11 pages

EXAM 2

EXAM 2

17 pages

Quiz 1

Quiz 1

30 pages

Scarcity

Scarcity

12 pages

Exam 3

Exam 3

5 pages

Scarcity

Scarcity

48 pages

MIDTERM 1

MIDTERM 1

11 pages

MIDTERM 1

MIDTERM 1

10 pages

MIDTERM 2

MIDTERM 2

10 pages

Exam 2

Exam 2

9 pages

EXAM 1

EXAM 1

41 pages

Chapter 1

Chapter 1

20 pages

Test 1

Test 1

32 pages

Test 3

Test 3

3 pages

Exam 1

Exam 1

4 pages

Exam 3

Exam 3

12 pages

Exam 2

Exam 2

7 pages

Test 3

Test 3

21 pages

Chapter 1

Chapter 1

23 pages

Chapter 1

Chapter 1

35 pages

Exam 2

Exam 2

6 pages

Chapter 1

Chapter 1

15 pages

Exam 1

Exam 1

8 pages

EXAM 1

EXAM 1

12 pages

Chapter 1

Chapter 1

74 pages

Chapter 1

Chapter 1

18 pages

Exam 2

Exam 2

18 pages

Chapter 1

Chapter 1

29 pages

Exam 2

Exam 2

44 pages

Exam 2

Exam 2

10 pages

Exam 2

Exam 2

12 pages

Exam 2

Exam 2

12 pages

Chapter 1

Chapter 1

68 pages

Chapter 1

Chapter 1

23 pages

Chapter 1

Chapter 1

21 pages

Chapter 1

Chapter 1

23 pages

Chapter 1

Chapter 1

23 pages

Exam 2

Exam 2

13 pages

Exam 2

Exam 2

13 pages

Test 1

Test 1

31 pages

Chapter 1

Chapter 1

35 pages

Chapter 1

Chapter 1

27 pages

Chapter 1

Chapter 1

27 pages

Chapter 9

Chapter 9

16 pages

Exam 3

Exam 3

6 pages

Test 1

Test 1

8 pages

Chapter 1

Chapter 1

70 pages

Chapter 1

Chapter 1

70 pages

Chapter 1

Chapter 1

23 pages

Chapter 1

Chapter 1

14 pages

Exam 3

Exam 3

15 pages

Notes

Notes

1 pages

Chapter 1

Chapter 1

21 pages

Load more
Download Chapter 13: Production and Cost
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 13: Production and Cost and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 13: Production and Cost 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?