Laugher Curve. Costs. Introduction. Laugher Curve. The Firm and the Market. The Role of the Firm

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Jordan Hardy
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1 Laugher Curve Costs Chapter - (my version of it) A woman hears from her doctor that she has only half a year to live. The doctor advises her to marry an economist and to move to South Dakota. Laugher Curve Will this cure my illness? she asked. No, but the half year will seem pretty long. Introduction In the supply process, people first offer their factors of ion to the market. Then the factors are transformed by firms into goods that consumers want. ion is the name given to that transformation of factors into goods. The Role of the Firm The firm is an economic institution that transforms factors of ion into consumer goods it: Organizes factors of ion. Produces goods and services. Sells produced goods and services. The Firm and the Market Firms are the ion organizations that translate factors of ion into consumer goods.

2 The Role of the Firm In the supply process, people offer their factors of ion, such as land, labor, and capital, to the market Firms transform the factors into goods for consumers ion is the transformation of factors into goods Ultimately, all supply comes from individuals because control the factors of ion The Role of the Firm A firm is an economic institution that transforms factors of ion into goods and services Firms. Organize factors of ion and/or. Produce goods and services and/or. Sell produced goods and services A virtual firm organizes ion and subcontracts out all work Many of the organizational structures of business are being separated from the ion process - - The Role of the Firm A virtual firm only organizes ion. Virtual firms subcontract out all work. More and more of the organizational structure of business is being separated from the business. Firms Maximize Profit The goal of a firm is to maximize profits Profit = total revenue total cost For economists, total cost is explicit payments to the factors of ion 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 or service plus any increase in the value of the assets owned by the firm - Firms Maximize Profit Economists and accountants measure profit differently Accountants focus on explicit costs and revenues Accounting profit = explicit revenue explicit cost Economists focus on both explicit and implicit costs and revenue Economic profit = (explicit and implicit revenue) (explicit and implicit cost) - The ion Process The ion process can be divided into the long run and the short run Short run A firm is constrained in regard to what ion decisions it can make Some inputs are fixed Long run A firm chooses from all possible ion techniques All inputs are variable 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 the level of output -

3 Firms combine factors of ion to produce goods and services A ion table is a table showing the output resulting from various combinations of factors of ion or inputs Real-world ion tables are complicated A ion table shows the output resulting from various combinations of factors of ion or inputs. This analysis will concentrate on short run ion when in which one of the factors is fixed - is the additional output that will be forthcoming from an additional worker, other inputs remaining constant. is calculated by dividing total output by the quantity of the output. ion function a curve that describes the relationship between the inputs (factors of ion) and outputs. The ion function tells the maximum amount of output that can be derived from a given number of inputs.

4 A ion Table A ion Function Number of workers 9 Total output TP 9 Number of workers (a) Total per worker 9 Number of workers MP (b) and average AP # of workers A ion Table Total is the output per worker is the additional output that will be forthcoming from an additional worker, other inputs constant - The Law of Both and average ivities initially increase, but eventually they both decrease. The Law of This means that initially the ion function exhibits increasing. NOT IN YOUR BOOK The Law of The most relevant part of the ion function is that part exhibiting diminishing. Then it exhibits diminishing. THIS IS IN YOUR BOOK! Finally, it exhibits negative.

5 The Law of Law of diminishing as more and more of a variable input is added to an existing Fixed fixed input, after some point the additional output one gets from the additional input will fall. Number of workers 9 The Law of Total output absolute The Law of Graphing a ion Function Q absolute TP 9 Number of workers (a) Total per worker absolute 9 Number of workers MP (b) and average AP TP 9 Absolute A ion function is the relationship between then inputs and the outputs Number of workers - Graphing and ivity Q AP MP Absolute Eventually Then is first increases declines negative Number of workers -9 # of worker s Law of Total Law of diminishing states as more of a variable input is added to an existing fixed input, after some point the additional output from the additional input will fall Absolute -

6 The Law of This law is also called the flower pot law. If it did not hold true, the world s entire food supply could be grown in a single flower pot.

Production and Cost Analysis

Production and Cost Analysis The entire production process begins with the supply of factors of production or inputs used towards the production of a final good we all consume in the final good market.