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Chapter 7

Chapter 7- Producers in the Short Run.docx

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University of Toronto Mississauga
Kalina Staub

Chapter 7- Producers in the Short Run 7.2 Production, Costs, and Profits Production  Inputs can be grouped into four categories: 1. Inputs that are outputs from some other firm, such as spark plugs, electricity, and steel  Intermediate Products- All outputs that are used as inputs by other producers in a further stage of production 2. Inputs that are provided directly by nature, such as land owned or rented by the firm 3. Inputs that are the services of workers and managers employed by the firm 4. Inputs that are the services of physical capital, such as the facilities and machines used by the firm  Production Function- A functional relation showing the maximum output that can be produced by any given combination of inputs  Specifies the maximum amount of output that can be obtained from any given amounts of inputs Costs and Profits  Economic Profits > accounting profits because of implicit costs  Profits and Resource Allocation  Revenues > opportunity cost = firm in that industry will be earning economic profits = signal that resources can profitably be moved into that industry  Economic losses= some of that industry’s resources are more highly valued in other uses and owners of the resources will want to move them to those other uses  Economic profits and losses play crucial signalling role in the workings of a free market system Profit Maximizing Output  What happens to profits as output varies depends on what happens to both revenues and costs  How costs vary with output when the firm has some inputs that are fixed Time Horizons for Decision Making  Three types: 1. How best to use existing plant and equipment- short run  Length of time over which some of the firm’s factors of production, element of capital are fixed (plant and equipment) but can also be land, services of management of supply of skilled labour 2. What new plant and equipment and production processes to select- long run  Length of time over which all of the firm’s factors of production can be varied, but its technology is fixed  Corresponds to situation firm faces when it’s planning to go into business, expand scale of operations, branch out into new products/areas, or change method of production (planning decisions) 3. How to encourage or adapt to the development of new technologies- very long run  Length of time over which all the firm’s factors of production and its technology can be varied 7.3 Production in the Short Run  How output changes as the firm varies its amount of labour Diminishing Marginal Product  The law of diminishing returns states that if increasing amount of a variable factor are applied to a given quantity of a fixed factor (holding the level of technology constant), eventually a situation will be reached in which the marginal product of
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