ECON 2000 : ECON2000 Final Exam Review
Document Summary
When analyzing firm behavior, one needs to distinguish the short run from the long run. This chapter focuses on short run decisions by a firm. Knowledge of costs of production, and how they vary with the production level, in both the short run and the long run, is prerequisite to maximizing profits. Profit for a firm equals total revenue minus total costs, and there is a difference between accounting and economic profit. Almost all costs of production in the short run vary with the production level as a result of the law of diminishing marginal productivity. There are seven short run costs: total fixed costs, total variable costs, total costs, marginal costs, average fixed costs, average variable costs, and average total costs. This chapter emphasizes the relationship between these costs. The model of perfect competition is a benchmark from which to judge all real world markets.
