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Producers in the Short Run

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3. Inputs provided directly by people, such as labor services. 4. Inputs provided by the services of physical capital (machines) Production Function ... – PowerPoint PPT presentation

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Title: Producers in the Short Run


1
Chapter 7
  • Producers in the Short Run

2
Organization of Firms
  • Firms come in six basic types
  • Single proprietorships
  • Ordinary partnerships
  • Limited partnerships
  • Corporations
  • State-owned enterprises
  • Non-profit organizations
  • Some firms are multinational enterprises (MNEs),
    which operate in more than one country.

3
Financing of Firms
  • Firms use financial capital -- equity and debt.
  • A firm acquires funds from its owners in return
    for stocks, shares, or equity. Profits may be
    distributed as dividends, or may be retained.
  • A firms creditors are lenders -- using debt
    instruments (loans, bonds and securities in money
    markets).

4
Goals of Firms
  • Economists usually make two key assumptions about
    firms
  • firms are assumed to be profit-maximizers
  • each firm is assumed to be a single, consistent,
    decision-making unit

5
Production
  • Firms use four types of inputs for production
  • 1. Intermediate products
  • 2. Inputs provided directly by nature
  • 3. Inputs provided directly by people, such as
    labor services
  • 4. Inputs provided by the services of physical
    capital (machines)

6
Production Function
  • The production function relates inputs to
    outputs. It describes the technological
    relationship between the inputs that a firm uses
    and the output that it produces. Remember that
    production is a flow it is a number of units per
    period of time.

Q f(L,K)
7
Costs and Profits
  • Accounting Profits Revenues Explicit Costs
  • Economic Profits Accounting Profits Implicit
    Costs
  • Economic profit includes both implicit and
    explicit costs. Implicit costs include the
    opportunity cost of the owners time and capital.

8
Time Horizons for Decision Making
  • The short run is a period of time in which some
    of the firms factors of production are fixed,
    typically capital is fixed in the short run
  • The long run is the length of time over which all
    of the firms factors of production can be
    varied, but its technology is fixed.
  • The very long run is the length of time over
    which all the firms factors of production and
    its technological possibilities can change.

9
Production in the short run
  • Total product (TP) is the total amount of output
    that is produced during a given period of time.
  • Average product (AP) is the total product divided
    by the number of units of the variable factor
    used to produce it (usually thought of as labor)
  • Marginal product (MP) is the change in total
    product divided by the number of units of the
    variable factor

10
The AverageMarginal Relationship
  • If an additional workers output raises the
    average product, the MP must exceed AP.
  • Similarly, if the marginal workers output
    reduces the average product, the MP must be less
    than the AP.
  • The AP curve slopes upward as long as the MP
    curve is above it (and AP slopes downward when MP
    is below it).
  • It follows that the MP curve must intersect the
    AP curve at its maximum point.

11
Costs in the Short Run
  • Total cost (TC) Total fixed cost (TFC) Total
    variable cost (TVC)
  • Average Total cost (AC) Average fixed cost
    (AFC) Average variable cost (AVC)
  • Marginal cost (MC) is the increase in total cost
    resulting from increasing the output by one unit.

12
Why U-Shaped Cost Curves?
  • Eventually diminishing AP of the variable factor
    implies eventually rising AVC.
  • AVC is at its minimum when AP reaches its
    maximum.
  • Eventually diminishing MP of the variable factor
    implies eventually rising MC.
  • MC reaches its minimum when MP reaches its
    maximum.
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