Theory of the Firm Intro

short run definition

one input (factors of production, most likely capital) is fixed

long run definition

all inputs/FOP are variable

what happens in longrun, what do firms want to do if reach productive capacity

want to expand size of operation by varying inputs (more efficient methods of production)

total product

total output from variable and fixed facors

average product

Total Product/Quantity of labour

Marginal Product

tp now - tp before

more unit of variable input (LABOUR)—> more extra output

however decreases because diminishing marginal returns: addition of workers may let production increase but not fully use capital to potential.

Total Revenue

Price * Quantity

Marginal Revenue

change in TR/change in Quantity

Average Revenue

total revenue/q

Average Fixed Costs

TFC/Q

Average Variable Costs

TVC/Q

Average Total Costs

AFC + AVC or TC/Q

Marginal Cost

change in TC/TVC over change in Quantity

MC relationship with ATC/AVC

intersect at minimum

ATC AVC why converge

as output increases, more quanity to pay for fixed costs, lowering the gap

Marginal Cost relationship with Marginal Product

MC DECREASES initially bc MP is increasing due to more output produced

however MP decreases due to diminishing marginal returns, thus MC increases

total economic cost

Implicit + Explicit costs

explicit costs

economic transactions from external provider

need to buy to use from others

implicit costs

earnings a firm could have made bc

dont need to buy, provided by firm

total costs

fixed + variable costs

fixed costs

stays the same as output changes

eg. rent, interest rate loans

variable costs

changes as output changes

eg. electricity, labour wage costs

economies of scale

downwards section of LRATC

as operation size increase, average production cost decreases

diseconomies of scale

upwards section of LRATC

as operation size increases, production costs increase

minimum efficient scale is where

lowest point of LRATC = lowest average cost

economies of scale reasons (6)

1. bulk buying

2. different production methods

3. labour specialization

4. managing structure

5. advanced capital

6. RD, marketing

diseconomies of scale reasons (3)

1. office politics/ low morale

2. communication inefficiency

3. regulations

LRATC and SRAC curve relation

idk

normal profits

0

abnormal profits

positive