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Chapter 10

Chapter 10 - Organizing Production.docx

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ECON 1000
Ardeshir Noordeh

ECON 1000 November 5, 2013 CHAPTER 10: Organizing Production The Firm & It’s Economic Problem • Firm: institution that hires factors of production and organizes them to produce and sell goods and services o Firm’s goal is to maximize profit. If it fails, it’s either eliminated or taken over by another firm seeking to maximize profit. • Accounting Profit = total revenue – total cost • Economic profit = total revenue – total cost (measured as the opportunity cost of production) o Firm’s opportunity cost of production is the sum of the cost of using resources  Bought in the market (could have bought different resources)  Owned by the firm (could have sold capital and rented capital from another firm) • Implicit rental rate: firm’s opportunity cost of using the capital it owns o Made up of:  Economic depreciation: change in market value of capital over given time  Interest foregone: return on funds used to acquire the capital  Supplied by the firm's owner • The owner might supply entrepreneurship and/or labour. • The profit that an entrepreneur can expect to receive on average is normal profit (the cost of entrepreneurship and is an opportunity cost of production • To maximize profit, a firm must make five basic decisions: o 1. What to produce and in what quantities o 2. How to produce o 3. How to organize and compensate its managers and workers ECON 1000 November 5, 2013 o 4. How to market and price its products o 5. What to produce itself and what to buy from other firms • Firm’s profit is limited by 3 features of the environment: o Technology constraints  Technology is any method of producing a good or service.  The firm can produce more only if it hires more resources, which will increase its costs and limit the profit of additional output. o Information constraints o Market constraints • Technological efficiency occurs when a firm uses the least amount inputs to produce a given quantity of output. • Economic efficiency occurs when the firm produces a given quantity of output at the least cost L K Q A 3 10 100 B 5 8 100 C 4 10 100 C is technologically inefficient because option A gives you the same output for less labour. A and B are both technologically efficient but you can’t tell which is better Method Labour Capital Cost A 1 1000 250,000 B
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