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Lecture Economics: The basics (2/e): Chapter 4 - Michael Mandel

Chapter 4 - How businesses work. After reading the material in this chapter, you should be able to: Explain and apply the economic perspective on business operations; define and apply the production function, average product, and marginal product; discuss the implications of the cost function, average cost and marginal cost; explain the difference between variable costs and fixed costs;. | Chapter 4 How Businesses Work McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Explain and apply the economic perspective on business operations. Define and apply the production function, average product, and marginal product. Discuss the implications of the cost function, average cost and marginal cost. Explain the difference between variable costs and fixed costs. Define and apply the revenue function and marginal revenue. Determine the profit-maximizing level of output. 4- The Nature of Business The outputs of a business are the goods and services that it sells to customers. The inputs are the goods and services that the business uses to produce the outputs. Production is the process of turning inputs into outputs. 4- The Flow of Money A business collects and spends money. Revenue is the money that customers pay for the output of a business. Cost is the money that the business pays for its inputs. The difference between revenue and cost is profits. 4- How a Business Operates Buyers Flow of goods and services Flow of money Business Inputs Outputs Cost of inputs Revenue from selling outputs Production Suppliers of labor and other inputs Profit maximization 4- Profit Maximization The main objective of business is to maximize profits. Businesses operate to create the largest difference between revenues and cost. It is difficult to consistently produce high profits. Profits vary significantly among different businesses and firms. 4- Inputs Used in Production Businesses use 5 main inputs in producing outputs: Labor refers to the hours of work supplied by the various types of workers. Capital is all the long-lived physical equipment, software, and structures a business uses in its production process. Businesses can either own or rent the capital it uses. 4- Inputs Used in Production The third input is land. Some industries are very land-intensive, such as agriculture and mining. . | Chapter 4 How Businesses Work McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Explain and apply the economic perspective on business operations. Define and apply the production function, average product, and marginal product. Discuss the implications of the cost function, average cost and marginal cost. Explain the difference between variable costs and fixed costs. Define and apply the revenue function and marginal revenue. Determine the profit-maximizing level of output. 4- The Nature of Business The outputs of a business are the goods and services that it sells to customers. The inputs are the goods and services that the business uses to produce the outputs. Production is the process of turning inputs into outputs. 4- The Flow of Money A business collects and spends money. Revenue is the money that customers pay for the output of a business. Cost is the money that the business pays for its inputs. The .