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:
Profit is the difference between the firm’s revenues and costs:
=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
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:
2. Information and organization
Technological and economic efficiency:
Technological efficiency is when the firm produces a given output by using the least amount of
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