The Firm’s Problem- Objective:
maximize profits
- Revenue – Costs = Profit
- (P * Q) – VC – FC = Profit
- Constraints:
- Costs
- Demand
- Market Price
The Firm’s Decision Process- Long-Run Decision
- What product?
Technology? Scale?
Fixed cost commitment?
- Short-Run
- What price?
- Calculate Profit
Opportunity Costs- Explicit Costs
- requires actual spending of money – easily measurable
- Implicit Costs
- opportunity cost & value foregone, no actual money changes hands
- -- estimated in dollar terms
What Is Profit?- Profit = Revenues – Costs
- Accounting Profit =
- Revenues – Explicit Costs
- Economic Profit =
- Revenues – (Explicit costs + Implicit costs)
Production (Q) and Costs- Fixed Costs:
- Costs which do not change as Q increases
- Variable Costs
- Costs which increase as Q increases
- Total Costs
- = Fixed Costs + Variable Costs
Comparing Costs to Quantity- Total Cost:
- Total of all costs paid to produce all units from 1 through Q)
- Average Cost:
- Cost of each of the Q units
- = Total Cost / Q
- Marginal Cost
- Cost of producing one more unit
- “increase in total costs when Q is increased 1 unit”
Production & Costs: Short Run- Production with One Variable Input in the Short Run
- From Marginal Physical Product to Marginal Costs
- More than One Variable Input
- A Set of Short-Run Cost Curves
- Some Geometric Relationships
Short-Run Cost Curves- Formulas:
- Total Cost:
- Marginal Cost:
- Average Variable Cost:
- Average Fixed Cost:
- Average Total Cost:
Why Do Cost Curves Increase?-
- production function
- relationship between the quantity of inputs a firm uses and the quantity of output it produces.
- fixed input
- quantity is fixed and cannot be varied.
- variable input
- quantity can vary
- more variable input more output
Diminishing Returns to an Input- Suppose:
2 resources combine to produce 1 product
- then more resource more output
- BUT
what if only 1 resource can be increased?
- diminishing returns to an input
- an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.