FINALS - SECOND TERM

• Theory of Production

  • Fundamentals of Production Theory
  • Essential concepts of business costs
  • Production + cost - businesses decide how much output to produce
• Economic costs - payments a firm must make, or incomes it must provide to attract resources it needs away from alternative production opportunities
• Explicit costs - monetary payments (cash expenditures) for the use of resources that is owned by others
• Implicit costs - opportunity costs of using self-owned or self-employed resources
• Normal profit as a cost - the cost of doing business; economists include as costs of production all the costs of implicit, explicit, including normal profit is required to attract and retain the resources of the specific line of production
• Economic profit (Pure profit) - this is not a cost because this is the return in excess of the normal profit that is required to retain the entrepreneur in the particular line of production
• Fixed input - inputs the quantity of which cannot be readily changed when market conditions indicate that a change in output is desirable
• Variable input - inputs the quantity of which may be readily changed when market conditions indicate that a change of output is desirable
• Short run - period of time when one or more productive agent is fixed
• Long run - all inputs are variable
• Total Product - total quantity/total output of a particular good produced
• Marginal product - extra output or added product associated with adding a unit of variable resource, in this case, labor
• Average product - labor productivity and output per unit of labor input
• Behavior of MP and AP

  1. Both MP and AP first increase, then decrease, with MP becoming negative
  2. MP reaches a peak before the peak of AP is attained
  3. At the peak of AP, MP is equal to AP

  All these because TP at first increases at an increasing rate, then increases at a decreasing rate, and finally decreases
• Law of Diminishing Marginal Returns - as successive variable resources are added to fixed resources, beyond some point the extra or marginal product that can be attributed to each additional unit of the variable input will decline
• 3 stages of production:

  1. covers the range of variable input used over which AP increases and area of which the AP is at its peak
  2. area at which MP is positive but less than AP
  3. area at which MP is negative or TP is declining
• Formulas:

  Marginal Product - Change in TP/Change in labor input

  Average Product - TP/ units of labor

  Total Revenue - Price x Quantity

  Accounting Profit - Total Revenue - Explicit costs

  Economic Profit - Total Revenue - Economic costs