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WEEK 8.docx

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York University
ECON 1000
George Georgopoulos

WEEK 8 CHAPTER 10: ORGANIZING PRODUCTION Firm – is an institution that hires factors of production and organizes them to make and sell goods. Their goal is to maximize profits Depreciation – fall in value of a firm’s capital A firm measures its finances to make sure it pays the correct amount of taxes and show investors how they are doing Economic profit – total revenue – total cost (opportunity cost of production) Opportunity cost of production – value of the best alternative use of the resources a firm uses (expressed in $$) If resources are bought in the market, the opportunity cost of production is the amount spent on it If the firm owns resources, the opportunity cost is measured because the unit could be sold and the capital could be rented from another firm. This is called implicit rental rate of capital. This has two components:  Economic depreciation – fall in the market value of a firm’s capital  Forgone interest – funds used to buy capital can be invested with interest Resources supplied by the firm’s owners may be both entrepreneurship and labour  Entrepreneurship – organizes firm and makes decision with a return of profit. Normal profit is the average earning of an entrepreneur (cost of production)  Owner’s Labour Services – owner might supply labour but not take a wage. The opportunity cost is the income forgone To make a maximum economic profit, the firm must make 5 decisions? 1. What and how much to produce 2. How to produce 3. How to organize and compensate workers 4. How to market and price its products 5. What to produce itself and buy from others Constraints to maximum economic profit are: Technology constraints: technology is any method of producing a good and it advances over time. To produce more output, firms must hire more resources (increasing costs) Information constraints: limited information about the quality and efforts of workers, future buying plans of customers, and plans of competitors Market constraints: quantity bought and price depend on customers and other firms Technological efficiency – produces a given output using the least amount of inputs Economic efficiency – produces a given output at the least cost A technologically inefficient methods is never economically efficient Economic efficiency depends on the relative costs of resources CHAPTER 11: OUTPUT AND COSTS Decisions are made in order to achieve one goal: maximize profits Entrepreneurs make a big decision about which industry to establish a firm There are two different decisions time frames: Short run – time frame where quantity of at least one factor of production is unchanged (easily reversed) Long run – time frame where quantities of all factors of production can be changed (not easily reversed). Sunk cost – past expenditure on a plant that has no resale value SHORT RUN TECHNOLOGY CONSTRAINT Total product – maximize output that a given quantity of labour can produce Marginal product – results from a one-unit increase in the quantity of labour Average product – total product divided by the quantity of labour Points on the total product curve are technologically efficient (think PPF) The height of a bar and the slope of that total product curve measures marginal product Almost every production process has two features:
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