Isues in economics today 6th by guell chapter04

Basic Definitionsbusiness makes: Revenue minus Cost incurred in order to produce goods for sale comes into the firm from the sale of their goods... • Production Function : a graph wh

Chapter 04

Firm Production, Cost, and Revenue

Basic Definitions

business makes: Revenue

minus Cost

incurred in order to produce

goods for sale

comes into the firm from the

sale of their goods

Economic vs Accounting Cost

those that must be paid as well

as those incurred in the form of

forgone opportunities, of a

business

costs that must be explicitly

paid by the owner of a business

• Production Function : a

graph which shows how many

resources we need to produce

various amounts of output

• Cost Function: a graph which

shows how much various

amounts of production cost

Inputs to Production

• Fixed Inputs : resources that

you cannot change

• Variable Inputs : resources

that can be easily changed

Concepts in Production

divide up the tasks in such a

way that each can build up a

momentum and not have to

switch jobs

notion that there exists a point

where the addition of resources

increases production but does

so at a decreasing rate

Figure 1 The Production Function

Output

Workers

Production Function

C

D

• Fixed Costs: costs of

production that we cannot

change

• Variable Costs: costs of

production that we can

change

Figure 2 The Total Cost Function

Cost Concepts

associated with one additional unit of output

cost per unit of production

Cost/Output, the average variable cost per

unit of production

Cost/Output, the average fixed cost per unit

of production

Figure 3 Marginal Cost, Average Total,

Average Variable, and Average Fixed Cost

P

Q

MC

ATC AVC

AFC

• Marginal Revenue:

additional revenue the firm

receives from the sale of each

unit

Figure 4 Setting the Price When There are Many Competitors

Figure 5 Marginal Revenue

When there are No Competitors

MR Market for Memory P

D

Numerical Example For the Many Competitors Case

Numerical Example For the

Maximizing Profit

• We assume that firms wish to maximize profits

Market Forms

• Perfect Competition: a

situation in a market where

there are many firms producing the same good

• Monopoly : a situation in a

market where there is only one firm producing the good

Rules of Production

• A firm should

a) produce an amount such that

Marginal Revenue equals

Marginal Cost (MR=MC),

unless

b) the price is less than the

average variable cost (P<AVC).

©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 4-23

Numerical Example of Profit Maximization

With Many Competitors