Chapter 5
Chapter 4
Firm Production, Cost and Revenue
Chapter Objectives
After reading this chapter you should be able to
• Understand the relationship between production and costs and the relationship between sales and revenues.
• Recognize that models of production are based on the assumption that firms seek to maximize profit.
• See how profit maximization dictates that firms set production so that marginal cost equals marginal revenue.
Definitions
• Profit: The money that business makes: Revenue-Cost
• Cost: the expense that must be incurred in order to produce goods for sale
• Revenue : the money that comes into the firm from the sale of their goods
Accounting vs. Economic Profit
• Economic Cost: All costs, both those that must be paid as well as those incurred in the form of forgone opportunities, of a business
• Accounting Cost: Only those costs that must be explicitly paid by the owner of a business
Production
• Production Function: a graph which shows how many resources we need to produce various amounts of output
• Cost Function: a graph which shows how much various amounts of production cost
Inputs to Production
• Fixed Inputs: resources that you cannot change
• Variable Inputs : resources that can be easily changed
Concepts of Production
• Division of Labor: workers divide up the tasks in such a way that each can build up a momentum and not have to switch jobs
• Diminishing Returns: the notion that there exists a point where the addition of resources increases production but does so at a decreasing rate
The Production Function
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
Numerical Example
Table 1
Numerical Example
Production Function
|Labor |Total Output |Extra Output of the|
| | |Group |
|0 |0 | |
|1 |100 |100 |
|2 |317 |217 |
|3 |500 |183 |
|4 |610 |110 |
|5 |700 |90 |
|6 |770 |70 |
|7 |830 |60 |
|8 |870 |40 |
|9 |900 |30 |
|13 |1000 | |
Costs
Fixed vs. Variable Costs
• Fixed Costs: costs of production that we cannot change
• Variable Costs: costs of production that we can change
The Total Cost Function
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
Cost Concepts
• Marginal Cost: the addition to cost associated with one additional unit of output
• Average Total Cost: Total Cost/Output, the cost per unit of production
• Average Variable Cost: Total Variable Cost/Output, the average variable cost per unit of production
• Average Fixed Cost: Total Fixed Cost/Output, the average fixed cost per unit of production
Average Total, Average Variable, Average Fixed and Marginal Costs
[pic]
[pic]
[pic]
[pic]
[pic]
Table 2
Numerical Example
Cost Functions
|Output |Total |Total |Total |MarginalCost*|Average |AverageVariab|Average Fixed|
| |Variable Cost|Fixed |Cost | |Total |le Cost |Cost |
| | |Cost | | |Cost | | |
|0 |0 |8500 |8500 | | | | |
|100 |2500 |8500 |11000 |25 |110 |25 |85 |
|200 |3800 |8500 |12300 |13 |62 |19 |43 |
|300 |4800 |8500 |13300 |10 |44 |16 |28 |
|400 |6000 |8500 |14500 |12 |36 |15 |21 |
|500 |7500 |8500 |16000 |15 |32 |15 |17 |
|600 |9500 |8500 |18000 |20 |30 |16 |14 |
|700 |12500 |8500 |21000 |30 |30 |18 |12 |
|800 |17000 |8500 |25500 |45 |32 |21 |10.6 |
|900 |22500 |8500 |31000 |55 |34 |25 |9.4 |
|1000 |32500 |8500 |41000 |100 |41 |32.5 |8.5 |
* change in Total Cost / 100
Revenue
• Marginal Revenue : additional revenue the firm receives from the sale of each unit
Setting the Price When There are Many Competitors
[pic]
[pic]
[pic]
Marginal Revenue When there are No Competitors
[pic]
[pic]
Numerical Example
Table 3
Numerical Example
Revenue When There are Many Competitors.
|Q |Price |TR |MR* |
|0 |45 |0 | |
|100 |45 |4,500 |45 |
|200 |45 |9,000 |45 |
|300 |45 |13,500 |45 |
|400 |45 |18,000 |45 |
|500 |45 |22,500 |45 |
|600 |45 |27,000 |45 |
|700 |45 |31,500 |45 |
|800 |45 |36,000 |45 |
|900 |45 |40,500 |45 |
|1000 |45 |45,000 |45 |
• the change in Total Revenue / 100
Table 4
Numerical Example
Revenue When There Are No Competitors
|Q |Price |TR |MR* |
|0 |75 |0 | |
|100 |70 |7,000 |70 |
|200 |65 |13,000 |60 |
|300 |60 |18,000 |50 |
|400 |55 |22,000 |40 |
|500 |50 |25,000 |30 |
|600 |45 |27,000 |20 |
|700 |40 |28,000 |10 |
|800 |35 |28,000 |0 |
|900 |30 |27,000 |-10 |
|1000 |25 |25,000 |-20 |
• change in Total Revenue / 100
Maximizing Profit
•We assume that firms wish to maximize profits
Market Forms
• Perfect Competition: a situation in a market where there are many firms producing the same good
• Monopoly: a situation in a market where there is only one firm producing the good
Rules of Production
• A firm should
– produce an amount such that Marginal Revenue equals Marginal Cost (MR=MC),
– unless
– the price is less than the average variable cost (P ................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- psychology chapter 5 learning exam
- connect chapter 5 homework
- connect chapter 5 homework accounting
- chapter 5 photosynthesis quizlet
- chapter 5 psychology test
- chapter 5 learning psychology quiz
- quizlet psychology chapter 5 learning
- summary chapter 5 tom sawyer
- chapter 5 tom sawyer summary
- chapter 5 psychology learning quiz
- psychology chapter 5 review test
- psychology chapter 5 test answers