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Organizing Production.docx

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ECON 101
Wokia Kumase

Oct 28 Organizing production 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 is made. 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 production. -->consists of 3 parts: the cost
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