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Notes for Chapter 10.doc

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Simon Fraser University
ECON 103
Vera Lantinova

Fraser International College ECON1034 “Principles of Microeconomics” Chapter 10: Organizing Production THE KEY CONCEPTS in this chapter: - The difference between accounting profit and economic profit. - The difference between technological and economic efficiency. - Types of markets. - Measures of market concentration. A firm is an institution that hires factors of production and organizes those factors to produce and sell goods and services. The economic problem of the firm is to Allocate the scarce resources. The firm is constrained by: - Technology - Information - Market Profit is the difference between the firm’s revenues and costs: =TR-TC =TR (PxQ)-TC (FC+VC) 1 Depending on what costs are considered, profit could be: - Accounting profit: considers direct costs of production and depreciation (fall) of the value of firm’s capital - Economic profit: considers opportunity cost of production Econmic Profit = Accountung Profit –Implict Cost. Opportunity cost of production is the highest-valued alternative forgone. The firm incurs opportunity cost with all of its resources used in production: - Resources bought in the market Suppose a firm spend 200 million on production of goods so the opportunity cost of production is 200 million which they have spend on production of that good. - Owned by the firm (physical capital, financial funds) In the way that when firm use capital to produce goods it is forgoing its use which can be implemented on other good thus the thing left is the opportunity cost. - Supplied by the firm’s owner (labor, entrepreneurship) Enterpenuerdhip and Owners Labour Service which he can earn if he do job in other palce. To maximize economic profit, a firm must decide: 1. What to produce and in what quantities 2. How to produce 3. How to organize and compensate workers 4. How to market and price its products 5. What to produce itself and what to buy from others 2 In the above decisions, the firm is constrained by: 1. Technology 2. Information and organization 3. Market Technological constraints Technological and economic efficiency: Technological efficiency is when the firm produces a given output by using the least amount of inputs. Economic efficiency is when the firm produces a given output at the least cost. A technologically inefficient method is always economically inefficient as well All Econmic efficnt methds or also technologically efficnt. . Economic efficiency depends on prices of inputs and relative costs of inputs. Information and organization constraints Firms could organize production a
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