Week 4 POE: Theory of the Firm

Covers the Firm, as well as production and labor

Firm

Producer that combines inputs to produce outputs

Inputs of Firm Production (4)

labor, capital, land, raw materials

Questions for the firm (5)

What to produce?

How much?

How to produce?

What price to charge?

How much labor is needed?

Questions about market structure (4)

How much market share per firm?

How similar are products in an industry?

Difficulty to enter

How do firms compete?

3 places firms compete

1. product difference

2. advertising

3. price

Perfect Competition

many firms with identical products

Monopolistic competition

many firms with similar products

Oligopoly

Few firms with identical or similar products

Monopoly

One firm, with a product with no substitutes

Private Enterprise

Individual or group business ownership

Types of Private Enterprise (3)

Sole proprietor

Partners

Corporation

Types of cost (2)

Explicit and Implicit

Explicit Cost

out of pocket costs of production.

wages, raw material, rent

Implicit Cost

cost of using resources a firm already owns. i.e opportunity cost

Accounting Profit

tot revenue-explicit cost

The difference between dollars in and dollars out

Economic Profit

profit taking into account both explicit and implicit costs

5 factors of production

natural resources

labor

capital

technology

entrepreneurship

Fixed Inputs

Can’t be increased or decreased easily in the short run

Define the max production possibility

Variable Inputs

Easily increased or decreased

Short Run

Time pd in which some factors are fixed and some are variable

Long Run

time period in which all factors are variable

Marginal Product

Additional output of an additional worker

Law of Dim Marginal Product

As more and more labor is added, their MP decreases. Is a characteristic of the short run production possibility.