Chapter 11 - Production and cost analysis I. After reading this chapter, you should be able to: Explain the role of the firm in economic analysis; describe the production process in the short run; calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs; distinguish the various cost curves and describe the relationships among them. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain the role of the firm in economic analysis Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs Describe the production process in the short run Distinguish the various cost curves and describe the relationships among them 2 The Role of the Firm Firms transform the factors into goods and services to consumers Production is the transformation of factors into goods In the supply process, people offer their factors of production, such as land, labor, and capital, to the market Ultimately, all supply comes from individuals because they control the factors of production 3 The Role of the Firm Organize factors of production and/or Produce goods and services and/or Sell produced goods and services Some firms don’t have a physical location and don’t “produce” anything; they simply subcontract out all production. A firm is an economic institution that transforms factors of production into goods and services Many of the organizational structures of business are being separated from the production process Firms: 4 Firms Maximize Profit For economists, total cost is explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm For economists, total revenue is the amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm Profit = Total revenue – Total cost The goal of a firm is to maximize profits 5 The Production Process A firm chooses from all possible production techniques All inputs are variable The production process can be divided into the long run and the short run The terms long run and short run do not necessarily refer to specific periods of time, but to the flexibility the firm has in changing its inputs Short run Long run A firm is constrained in . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain the role of the firm in economic analysis Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs Describe the production process in the short run Distinguish the various cost curves and describe the relationships among them 2 The Role of the Firm Firms transform the factors into goods and services to consumers Production is the transformation of factors into goods In the supply process, people offer their factors of production, such as land, labor, and capital, to the market Ultimately, all supply comes from individuals because they control the factors of production 3 The Role of the Firm Organize factors of production and/or Produce goods and services and/or Sell produced goods and services Some firms don’t have a physical location and don’t “produce” anything; they simply subcontract out .
