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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps. | Lecture Issues in economics today - Chapter 5 Chapter 5 Firm Production Cost and Revenue McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Chapter Outline Production Costs Revenue Profit and Profit Maximization McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Basic Definitions Profit The money that business makes Revenue minus Cost Cost the expense that must be incurred in order to produce goods for sale Revenue the money that comes into the firm from the sale of their goods McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Economic vs. Accounting Cost Economic Cost All costs both those that must be paid as well as those incurred in the form of forgone opportunities of a business Accounting Cost Only those costs that must be explicitly paid by the owner of a business McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Production 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 McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Inputs to Production Fixed Inputs resources that you cannot change Variable Inputs resources that can be easily changed McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Concepts in Production Division of Labor workers divide up the tasks in such a way that each can build up a momentum and not have to switch jobs Diminishing Returns the notion that there exists a point where the addition of resources increases production but does so at a decreasing rate McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Figure 1 The Production Function Output D Production C Function B A Workers McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. A Numerical Example Labor Total Output Extra Output of the Group 0 0 1 100 100 2 317 217 3
