TAILIEUCHUNG - Lecture Basic microeconomics - Chapter 9: Production and cost analysis I

When analyzing firm behavior, one needs to distinguish the short run from the long run. This chapter focuses on short run decisions by a firm. Knowledge of costs of production, and how they vary with the production level, in both the short run and the long run, is prerequisite to maximizing profits. | Production and Cost Analysis I Chapter 9 Introduction In the supply process, people first offer the factors of production they control to the market. Then the factors are transformed by firms into goods that consumers want. Production occurs when factors of production (inputs) transform into goods and services. The Role of the Firm A firm is an economic institution that transforms factors of production into consumer goods and services. The Role of the Firm A firm: Organizes factors of production. Produces goods and services. Sells produced goods to individuals, businesses or government. The Firm and the Market A firm operates within the market and, simultaneously, it abandons the market in the sense that it replaces the market with command and control. The Firm and the Market How an economy operates depends on transaction costs—costs of undertaking trades through the market. Firms Maximize Profit Firm’s goal is to maximize profit. Profit is the difference between total revenue and total cost. Profit = Total revenue – Total cost Firms Maximize Profit An accountant will calculate profit by subtracting explicit costs from the revenue. For an economist,the measure of profit is revenues minus both implicit and explicit costs. Firms Maximize Profit Implicit costs include the opportunity costs of the factors of production. Economic profit = Revenue – (Implicit costs +Explicit costs) The Production Process The production process is generally divided into a long run planning decision and the short run adjustment decision. The Long Run and the Short Run A long-run decision is a decision in which the firm can choose the least expensive method of producing from among all possible production techniques. The Long Run and the Short Run A short-run decision is one in which the firm is constrained by past choices in regard to what production decisions it can make. The Long Run and the Short Run The terms long run and short run do not necessarily refer to specific periods of time. .

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