Chapter 3 The Firm Makes Choices: Costs The Market
Chapter 3 The Firm Makes Choices: Costs & The Market
3. 1 INDUSTRIES AND PRODUCTION PROCESSES Industry It consists of a firm or a number of firms that use like processes to produce their outputs Production Value added Production tree inputs→ processes or activities.→ outputs
3.1 INDUSTRIES AND PRODUCTION PROCESSES • Industry – It consists of a firm or a number of firms that use like processes to produce their outputs. • Production – Value added – Production tree – inputs processes or activities outputs
3.2 COST FACIG THE FIRM Factors of production Natural Human Resources Human Resources Manufactured esources(manual functions)(mental functions)Resources Raw materials, Production work, Management P rocess Fuel Cl erical wor arkeTing machinery, Property on Cleaning work Commercia Machinery wnIc advice arts activities take Office ace equipment
3.2 COST FACIG THE FIRM • Factors of production Natural Resources Human Resources (manual functions) Human Resources (mental functions) Manufactured Resources Raw materials, Fuel, Property on which activities take place Production work, Clerical work, Cleaning work Management, Marketing, Commercial advice Process machinery, Machinery parts, Office equipment
3.2.1 Total revenue. Total Cost, and Profit Total revenue the amount a firm receives for the sale of its output Total cost the market value of the inputs a firm uses in roduction Profit Profit Total revenue -Total cost
3.2.1 Total Revenue, Total Cost, and Profit • Total Revenue – the amount a firm receives for the sale of its output. • Total Cost – the market value of the inputs a firm uses in production. • Profit – Profit = Total revenue - Total cost
Cost as Opportunity Cost Explicit Costs input cost that require an out lay of money by the firm Implicit Costs input costs that do not require an outlay of money by the firm Choice 1 deposit=$ 300, 000(interest rate=5% Choice 2 deposit$ 100,000 borrowed capital=$ 200,000
Cost as Opportunity Cost • Explicit Costs – input cost that require an outlay of money by the firm • Implicit Costs – input costs that do not require an outlay of money by the firm • Choice 1 – deposit=$300,000 (interest rate=5%) • Choice 2 – deposit=$100,000 – borrowed capital=$200,000
Economic Profit versus Accounting Profit Economic Prof计t total revenue minus total cost, including both explicit and implicit costs Accounting Profit total revenue minus total explicit cost
Economic Profit versus Accounting Profit • Economic Profit – total revenue minus total cost, including both explicit and implicit costs. • Accounting Profit – total revenue minus total explicit cost
Economists vs Accountants How an Economist How an Accountant Views a Firm Views a Firm Economic profit Accounting Revenue Implicit profit Revenue costs Total costs Explicit Explicit costs costs
Economists vs Accountants Economic profit Implicit costs Explicit costs Accounting profit Explicit costs How an Economist Views a Firm How an Accountant Views a Firm Revenue Revenue Total costs
3.3 PRODUCTION AND COST Assumption size of the cake factory is fixed quanti rity of cakes varies only by changing the number of workers realistic in the short run, but not in the long run
3.3 PRODUCTION AND COST • Assumption – size of the cake factory is fixed – quantity of cakes varies only by changing the number of workers. • realistic in the short run, but not in the long run
3.3.1 Production Function roduction function the relationship between quantity of inputs used to make a good and the quantity of output of that good marginal product the increase in output that arises from an additional unit of input diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the le input increases
3.3.1 Production Function • production function – the relationship between quantity of inputs used to make a good and the quantity of output of that good. • marginal product – the increase in output that arises from an additional unit of input. • diminishing marginal product – the property whereby the marginal product of an input declines as the quantity of the input increases
Susan s Production Function 1 Numbers Margi Ina Output Product of Cost of Cost of Total Cost Workers (cakes/hour) Labor Factory Workers of Inputs 0 30 0 $30 50 50 30 0 40 40 90 30 20 50 30 120 30 30 60 20 140 30 4 70 10 150 30 50 80
Susan' s Production Function 1 Numbers of Workers Output (cakes/hour) Marginal Product of Labor Cost of Factory Cost of Workers Total Cost of Inputs 0 0 50 40 30 20 10 $30 $0 $30 1 50 30 10 40 2 90 30 20 50 3 120 30 30 60 4 140 30 40 70 5 150 30 50 80