THE PRODUCTION PROCESS
THE PRODUCTION PROCESS :THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
Production : The process by which inputs are combined,transformed,and turned into outputs.
Firm : An organization that comes into being when a person or group of people decides to produce a good or services to made a perceived demand
Three decisions that all firms must make:
1. How much output to supply
2. How to produce that output
3. How much of each input to demand
a) PROFITS AND ECONOMIC COSTS
Profit (economic profit): The difference between total revenue and total cost.
Total revenue: The amount received from the sale of the product (q x P).
Total cost (total economic cost) : The total of
1. out-of-pocket costs
2. normal rate of return on capital
3. opportunity cost of each factor of production.
b) NORMAL RATE OF RETURN
Normal rate of return : A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
c) SHORT RUN VS LONG RUN DECISIONS
Short run : The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry
Long run: That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
d) THE BEST OF DECISION : MARKET PRICE OF OUTPUTS,AVAILABLE TECHNOLOGY,AND INPUT PRICES
The bases of decision making:
1. The market price of output
2. The techniques of production that are available
3. The prices of input
Determining the Optimal Method of Production
Optimal method of production: The productionmethod that minimizes cost.
THE PRODUCTION PROCESS
Production technology :The quantitative relationship between inputs and outputs.
Labor-intensive
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
Production : The process by which inputs are combined,transformed,and turned into outputs.
Firm : An organization that comes into being when a person or group of people decides to produce a good or services to made a perceived demand
Three decisions that all firms must make:
1. How much output to supply
2. How to produce that output
3. How much of each input to demand
a) PROFITS AND ECONOMIC COSTS
Profit (economic profit): The difference between total revenue and total cost.
Total revenue: The amount received from the sale of the product (q x P).
Total cost (total economic cost) : The total of
1. out-of-pocket costs
2. normal rate of return on capital
3. opportunity cost of each factor of production.
b) NORMAL RATE OF RETURN
Normal rate of return : A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
c) SHORT RUN VS LONG RUN DECISIONS
Short run : The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry
Long run: That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
d) THE BEST OF DECISION : MARKET PRICE OF OUTPUTS,AVAILABLE TECHNOLOGY,AND INPUT PRICES
The bases of decision making:
1. The market price of output
2. The techniques of production that are available
3. The prices of input
Determining the Optimal Method of Production
Optimal method of production: The productionmethod that minimizes cost.
THE PRODUCTION PROCESS
Production technology :The quantitative relationship between inputs and outputs.
Labor-intensive