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Econ 208 October 15th.docx

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McGill University
Economics (Arts)
ECON 208
Wendy Dickinson

th Econ 208 October 15 Mid term  Look at short term, Chapter 7 Producers in the Short Run 7.1 What are firms? Read in book can be tested for the final Goals of firms Economist usually make two key assumptions about firms 1. Firms are assumed to be profit-maximizes 2. Each firm is assumed to be single, consistent, decision-making unit. Is it socially responsible to maximize profits? Production, costs, and profits 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) The production function relates inputs to outputs; it describes the technological relationship between the inputs that firm uses and the outputs that it produces. In simple functional notation we have: Q=f(L,K) Remember that production is a flow; it is a number of units per period of time. Costs and Profits: Economic profits includes both implicit and explicit costs. Unlike the accounting definition of profit, economic profit includes the (implicit) opportunity cost of the owners time and capital in the firms cost. Economic profits are therefore less than accounting profits. Because they don’t look at opportunity cost. Need economic profits If an economic profit is positive, then the owner’s capital is earning more than it could in its next best alternative use. Look at table 7-1, accounting versus economic profit  Not the risk premium, you have the option of investing in government bonds which you have risk free interest on that risk free return is 4%. when you open a store there is a risk that you go broke, it’s a compensation for taking the risk (risk premium).  Shows the economist looking at the implicit cost Profit maximizing output A firm’s economic profit is equal to total revenues minus total economic costs π= TR-TC What happens to profits as outputs changes depends on what happens to both revenues and costs Time horizons for decision making The short run is a length of time over which some of the firm’s factors of production are fixed  Typically capital is fixed in the short run. Can be labor only is it a specific trained labor that there is not a lot of  Short run can depend on what the company is, not on actual time. The long run is the length of time over which all of the firm’s factors of production can be varied, but its technology is fixed. The very long run is the length of time over which all the firm’s factors of production and its technology can be varied. Teacher says long run and very long run in reality might be the same depends on the speed of technology and company, but since the text says there’s a difference there is. 7.3 Production in the Short Run Total, average, and marginal prices Total product (TP) is the total amount of output that i
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