Chapter 10

an organization that hires factors of production and organizes them to produce and sell goods

Total revenue - explicit costs - depreciation

total revenue minus total cost, including both explicit and implicit costs

The actual payment costs

opportunity costs

the value of the best alternative use of the resources that a firm uses in production

the firm's opportunity cost of using the capital it owns

Made up of
- economic depreciation: change in market value
- interest forgone: return on the funds used to acquire the capital

the cost of entrepreneurship and is an opportunity cost of production

1. What to produce and in what quantities
2. How to produce
3. How to organize and compensate its managers and workers?
4. How to market and price its products
5. What to produce itself and what to buy from other firms

Technology constraints
- using the available technology, the firm can only produce more if it hires more, hiring more resources increases costs

Information constraints
- firms have limited information

Market constraints
- constrained by consumer's willingness to buy and competitor's prices
- constrained by the willingness of people to work and invest in the firm

occurs when the firm produces a given output by using the least amount of inputs

The firm produces a given quantity of output at the least cost
- economic efficiency are also technological efficiency

Commands go down the hierarchy while information (feedback) goes upwards

Used when it is easy to monitor performance or when a small deviation from the ideal performance is very costly

Using rewards to induce workers to maximize firm's profits

Used when difficult to monitor performance or too costly to monitor

the period of time during which at least one of a firm's inputs is fixed

- Decisions can be easily reversed

the time period in which all inputs can be varied
- not easily reversed

a cost that has already been committed and cannot be recovered

- irrelevant to a firm's current decisions

to increase output in the short run, a firm must increase the amount of labor employed

1. Total product (TP)
- total output produced in a given period
2. Marginal Product (MP)
3. Average Product (AP)

TP increases, MP increases initially but then decreases, AP decreases

shows how the firm's TP, MP, and AP change as the firm varies the quantity of labor employed

A curve showing the relationship between the quantity of labor and the quantity of output produced

- Increasing marginal returns initially, diminishing marginal returns eventually

as a firm uses more of a variable factor of production with a fixed factor of production, the marginal product of the variable factor eventually diminishes

When MP > AP, AP increases

When MP < AP, AP decreases

When MP = AP, AP is at its maximum

To produce more output in the short run, the firm must employ more labor, which means that it must increase its costs

TP curve flipped

the change in total costs associated with a one-unit change in output

- over the range of increasing marginal returns, MC falls

- over the range of diminishing marginal returns, MC rises

U-shaped

AVC falling = MC below

AVC rising = MC above

AVC minimum point is at AVC = MC

Replace AVC with ATC and it still applies

MP at maximum = MC at minimum

MP rising = MC falling

AP at maximum = AVC at minimum

AP rising = AVC falling

1. technology
2. prices of factors of production

the relationship between the maximum output attainable and the quantities of both labor and capital

tendency for the marginal product of capital to fall as capital per worker rises

factors that cause a producer's average cost per unit to fall as output rises

the situation in which a firm's long-run average costs rise as the firm increases output

the situation in which a firm's long-run average costs remain unchanged as it increases output

The lowest rate of output at which the long run average cost reaches its lowest value