how can firms be organized
- single proprietorship
- ordinary proprietorship
- limited partnership
- corporation
- state owned enterprise
- non profit organization
profit
total revenue - total cost
total revenue
amount received from sale of output
total cost
market value of inputs firm uses in production
explicit costs
- input costs that require outlay of money by firm
- ex. flour, labour, rent
implicit costs
- input costs that dont require outlay of money from firm
- ex. instead of baking cookies, could be a professor (opportunity cost of time(
accounting profit
total revenue - total explicit costs
economic profit
total revenue - (total explicit and implicit costs)
negative profits
- economic losses
link between production and costs
- link betwen costs when buying inputs and firm s production process
production function:
- relationship between quantity of inputs used to produce a good and quantity of good
Q = f(L,K)
inputs to production
- factors of production
- land, physical capital, labor, entrepreneurship
intermediate inputs
any inputs used in production process (ex. flour to make bread)
production function
increases at a decreasing rate (flatter)
total costs function
increases at an increasing rate (steeper)
marginal product of labour
- rational people hire at margin
- hire an extra worker: cost rise by wage paid to worker and output rise by MP
- diminishing returns: MP decreases as quantity of input increases
why diminishing returns?
- in the short run, some fixed inputs
- as more workers are added, typical worker will be less productive
fixed cost
- costs that dont vary with quantity of output produced (per cost unit)
variable cost
- costs that vary with quantity of output
total cost
fixed costs - variable costs
marginal cost increases with
quantity of output produced
average total costs curve is
- u shaped
- as Q rises, initally falling average fixed costs pulls average total costs down
- eventually average variable costs pulls average total cost up
firm producing an output less than minimum average total cost
- excess capacity
why is MC important
- if the cost of additional item is less than revenue that would be received, profits rise if more is produced
