1.Firm : institution
Hires factors of production(land,labor,capital,entrepreneurship)
Organizes them to produce and sell good and services.
Assumptions: 1) minimize risk
2)reach a pre-specified profit level
3)largest market share
4)firms are owner operated
** firms must make profit,or they’ll be bought or taken over by another firm...
So in long-run, firms that survive are the ones that maximize profits.
Maximizing approach: maximize output with a given set of input
Minimizing approach: minimize input with a given output
2. What are costs?
A) explicit costs: involve a direct monetary outlay
B) Implicit costs: do not involve outlays or cash
C) Opportunity cost(best forgone alternative) Economic costs: O.C=E.C+I.C
Accounting costs: only covers explicit costs that have been incurred in the past
D) sunk costs&non-sunk costs:
Sunk costs: costs that have already been incurred and cannot be recovered
Non-sunk costs(avoidable): costs that are incurred only if a particular decision
Whether a cost is sunk or non-sunk costs, depends on the shut-down price.(the
decision that is being contemplated)
Q: In long-run, will we have sunk costs?
A: we should not have sunk costs. long-run has nothing to do with time periods.
3. A firm’s opportunity cost of production
--> the value of the best alternative use of the resources that a firm uses in
-->consists of 3 parts: the cost