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firm
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an organization that transforms inputs into outputs for the purpose of sale
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maximize profit
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the firm's main objective
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proprietorship
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has a single owner of all assets and profits of the firm and unlimited liability for all debts of the firm
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partnership
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has two or more owners, all sharing in the profits and debts (liabilities) of the firm
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corporation
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a legal entity separate from its owners
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stockholder
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the liability of an owner (or stockholder) of a corporation is limited to the stockholder's initial investment
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market structure
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the level of competition present defines the market structure, ranging from perfect competition to pure monopoly
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perfectly competitive
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industries have many firms, each producing identical output, with no barriers preventing new firms from entering the industry in the long run
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pure monopoly
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on the opposite end of the spectrum, with only one firm producing an output for which there is no close substitute.
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Barriers to entry
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obstacles that make it unprofitable or impossible for new firms to enter an industry or market
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Monopolistic competition and oligopoly
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market structures that lie in between perfect competition and monopoly
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Profit
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profit = π = Total Revenue - Total Cost
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Total Revenue
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the price of the good (P) multiplied by the quantity sold of the good (Q):
Total Revenue = Price * Quantity = PQ
Total Revenue = Price * Quantity = PQ
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total economic cost
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-total cost in the profit equation represents total economic cost, which includes all opportunity costs associated with production.
-consists of explicit and implicit costs.
Total Economic Cost = Explicit Costs + Implicit Costs
-consists of explicit and implicit costs.
Total Economic Cost = Explicit Costs + Implicit Costs
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explicit costs
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costs that require direct monetary payments to the factors of production
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implicit costs
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the opportunity costs to the firm for the use of factors of production for which it does not make a direct monetary payment
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Accounting profit
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total revenue minus total explicit costs; implicit costs cannot be used for tax purposes and are neither included as a bookkeeping entry nor considered when calculating accounting profit
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economic profit
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-total revenue minus total explicit and implicit costs.
-the appropriate profit to consider in decision making from the firm's perspective
-the appropriate profit to consider in decision making from the firm's perspective
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zero economic profit
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a firm earns zero economic profit when total revenue is equal to total economic costs; a firm that is earning zero economic profit is not earning zero accounting profit because it is earning enough to cover all opportunity costs.
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normal profit
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a firm that is earning zero economic profit is said to be earning a normal profit because normal profit is the minimum require to keep the firm in business
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short run
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a period of time in which one or more factors of production are held constant.
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fixed inputs
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factors of production that are held constant
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Variable inputs
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in the short run, the firm will have variable inputs, such as labor, that it applies to its fixed inputs to produce an output
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long run
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a period of time in which a firm can vary all inputs
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variable
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the long run is a time period sufficient for the firm to change all inputs, including capital and plant capacity; in the long run, all factors of production are variable.
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supply curve
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the theory of how firms make short-run decisions is used to derive the supply curve
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shut down
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a firm that goes out of business in the short run is said to shut down (this can happen very suddenly and the owners must still pay for fixed inputs)
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exit
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a firm that waits until all fixed cost commitments are satisfied and goes out of business in the long run is said to exit the industry (a firm typically exits only after a long period of persistent losses)
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production function
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the production method chosen by the firm depends on several factors, including technology and input prices. Once the production method is chosen, there will be a mathematical relationship between the inputs and the output. This relationship is called the production function
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short-run production function
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assumes that at least one input is fixed
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marginal product
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in the short run, one or more inputs are being help constant and the output obtained from an additional unit of an input.
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law of diminishing returns or the law of diminishing (marginal) product
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initially, adding variable inputs to fixed inputs increases marginal product. However, as additional units of the variable input are added, marginal product will eventually decline.
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average product
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the measurement of how many units of output, on average, are produced by each unit of input
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