What are the main goals and objectives of a firm?
4. Production Decisions
- primary objective of a firm is to make a profit
- firm is striving to maximize profits
-Subordinate goals arise from the need to guarantee the long-term survival of the firm
What is the difference between economic profit and accounting profit & economists and accountants?
- Economic Profit (total revenue - total cost —>explicit + implicit costs)
- Accoutning Profit (total revenue - explicit costs)
When is a profit achieved?
- When total revenue exceeds both explicit and implicit costs, the firm earns economic profit.
- Economic profit is smaller than accounting profit
What´s an opportunity cost?
- A firm’s cost of production includes all the opportunity costs of making its output of goods and services
- Opportunity costs of deciding for one alternative is the value you forgo because you cannot choose the second-best alternative
- Opportunity cost of producing a good or service is the cost of producing a different good or product that has not been chosen
Difference between implicit and explicit costs
- Explicit costs are input costs that require a direct outlay of money by the firm.
- Implicit costs are input costs that do not require an outlay of money by the firm.
What is a production function?
production function the relationship between the quantity of inputs used to make a good and the quantity of output of that good
Explain the phenomena of diminishing marginal product both with and without an example
diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases
Example diminishing marginal product:
As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.
Difference Fixed and Variable Costs
Fixed and Variable Costs
Fixed costs need to be borne irrespective of whether any products have been produced
Variable costs depend on the scale of production (amount or # of units)
Whether a cost is fixed oder variable is dependent on the time horizon! Some costs may be variable in the short run, but fixed in the long run. F.E.
Paolo cannot expand the size of his factory. The only way he can produce additional pizzas is to hire more workers at the factory he already has. The cost of Paolo’s factory is, therefore, a fixed cost in the short run. By contrast, over a period of several years, Paolo can expand the size of his factory, build or buy new factories. Thus the cost of Paolo’s factories is a variable cost in the long run.
What kind of average costs exist?; How do they usually form?
-Cost divided by quantity of output produced
Types of average costs
Average Fixed Costs (AFC)—> FC/X
Average Variable Costs (AVC)—> VC/X
Average Total Costs (ATC)—> TC/X
Why is the AVT U shaped?
Fixed Cost Degression
Since fixed costs are divided over an increasing number of units, the average fixed cost is decreasing. This effect is called fixed cost degression.
With increasing average variable costs, this leads to a U shaped total average cost.
Explain dis-/economies of scale
Economies of scale
—> the property whereby long-run average total cost falls as the quantity of output increases.
Diseconomies of scale
—> the property whereby long-run average total cost rises as the quantity of output increases.
Which types of economies of scale exist?
Types of economies of scale:
• Risk bearing
• Location driven (external) —> agglomeration effect.
How should a perfectly competitive market be?
In a perfectly competitive market (numerously) many buyers and sellers are present. Also, the goods offered are homogeneous, that is, to consumers they are perfect substitutes. In the long run market entry is free. Therefore, market actors have no market power. They have no significant influence over market conditions like prices with their individual decisions. They act as price takers.
- Buyers and sellers behave as price takers and adjust only their quantity.
- A single supplier is unable to influence the market price with his quantity.
- It follows, the marginal revenue equals the price of the good: