ECON 208 Chapter 7-8: ECON - ch.7-8

21 views5 pages
Chapter 7 - Producers in the Short Run
Firms
1. Single Proprietorship a firm that has one owner who is
personally responsible for the firm’s actions or debts
2. Ordinary Partnership a firm that has two or more joint
owners, each of whom is personally responsible for the firm’s
actions of debts
3. Limited Partnership a firm that has two classes of owners:
general, partners who take part in managing the firm and who
are responsible for the firm’s actions and limited, partners who
take no part in management and risk only the money that they
have invested
4. Corporation a firm that has a legal existence separate from
that of the owners
5. State-owned Corporations owned by the government
(Crown)
6. Non-profit Organizations firms that provide goods and
services with the objective of just covering their costs. (NGOs,
non-governmental)
7. Multinational Enterprises (MNEs) firms that have
operations in more than one country
Financing
Dividends profits paid out to shareholders of a corporation
Bond a debt instrument carrying a specified amount, a
schedule of interest payments and usually a date for
redemption of its face value
Production
Intermediate Products all outputs that are used as inputs by
other producers in a further stage of production
Production Function functional relation showing the
maximum output that can be produced by any given
combination of outputs
Economic Profits the difference between the revenues of
output and opportunity cost of input
Time Horizons
Short Run a period of time in which the quantity of some
inputs cannot be increased beyond the fixed amount that is
available
Fixed Factor input whose quantity cannot be changed in the
short run
Variable Factor input whose quantity can be changed over the
time period under consideration
Long Run period of time in which all inputs may be varied, but
the existing technology of production cannot be changed
Very Long Run period of time that is long enough for the
technological possibilities available to a firm to change
Products in the Short Run
Total Product (TP) total amount produced by a firm during
some period
Average Product (AP) total product divided by the number of
units of the variable factor used in its production
Marginal Product the change in total output that results from
using one more unit of variable factor
Law of Diminishing Returns hypothesis that if increasing
quantities of a variable factor are applied to a given quantity of
fixed factors, the marginal product of the variable factor will
eventually decrease
Costs in the Short Run
Total Cost (TC) total cost of producing any given level of
output; can be divided into total fixed cost and total variable
cost
Total Fixed Cost (TFC) all costs of production that do not vary
with the level of output
Total Variable Cost (TVC) total costs of production that vary
directly with the level of output
Average Total Cost (ATC) total cost of producing a given
output divided by the number of units of output; can also be !
1
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in
Chapter 7 - Producers in the Short Run
calculated as the sum of average fixed costs and average
variable costs. Also called average cost.
Average Fixed Cost (AFC) total fixed costs divided by the
number of units of output
Average Variable Cost (AVC) total variable costs divided by
the number of units of output
Marginal Cost (MC) the increase in total cost resulting from
increasing output by one unit
——————————————————————————
Goals of Firms
1. Firms are profit-maximizers
2. Each firms is a single, consistent, decision-making unit
Profits = Total Revenue - Total Cost
Accounting Profits = Total Revenue - Explicit Costs
Economic Profits = Total Revenue - (Explicit + Implicit Costs)
Economic Profits < Accounting Profits because of implicit
costs
As output changes, what happens to profits depends on what
happens to both revenues and costs
TR: depends on the type of demand firms face
TC: depends on the time horizons for decision making
Law of Diminishing Returns
As more workers are added to a production process, each can
specialize in one task, and the workers’ MP initially rises.
But if there is a fixed
amounts of physical capital,
eventually the MP is likely to
fall. (ex. Photocopy
machine, coffee shops)
MP is the slope of TP curve
Average-Marginal Relationship: In order for the average
product to rise, the marginal product must exceed the average
product (ex. GPA)
-The AP curve slopes upward as long as the MP curve is
above it
-The AP curve slopes downward when MP is below it
Total Cost = TFC + TVC
Average Total Cost = AFC + AVC
Because fixed costs do not vary with output, the only part of
TC that changes is the variable cost
!
2
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Notes+

Unlimited access to class notes and textbook notes.

YearlyBest Value
75% OFF
$8 USD/m
Monthly
$30 USD/m
You will be charged $96 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.