# Producer decision Making Frederick University 2013.

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Producer decision Making Frederick University 2013

Producer Decision Making The firm Production Function Q = F(L,K, N)

Economic and Accounting Costs Costs vs. expenditures Opportunity cost Explicit and implicit cost Accounting cost vs. economic cost Sunk cost Depreciation Accounting profit = TR – accounting cost Economic profit = TR – economic cost

Analysis of the Production Function in the Short Run technological choice Technology – a way of putting resources together Efficient technology

Analysis of the production function short run short run There is at least one fixed factor Firms decisions are constrained by the fixed factor Is the demand changes, the firm can respond only by changing the quantity of output, not the scale of production

short run The Law of Diminishing Returns total, average and marginal product

Analysis of the Production Function long run Long run All factors are variable The firm can change its production capacity – the scale of production

Short-Run vs.Long-Run Costs Short run – Diminishing marginal returns results from adding successive quantities of variable factors to a fixed factor Long run – Increases in capacity can lead to increasing, decreasing or constant returns to scale

Returns to Scale Rs = % change in the output : % change in production factors Economies of Scale Rs > 1 Constant Returns to Scale Rs = 1 Diseconomies of Scale Rs < 1

Short-Run Costs Short run – there is at least one fixed factor Fixed cost – does not vary with the output Variable cost – directly related to variations in output The Law of diminishing marginal returns

Short-Run Costs Total Cost - the sum of all costs incurred in production TC = FC + VC Average Cost – the cost per unit of output AC = TC/Output Marginal Cost – the cost of one more or one fewer units of production MC = TC n – TC n-1 units

Short Run Costs Marginal Costs Marginal costs МС –Extra cost involved in the production of an extra unit of output

Short-Run Costs

The Revenues of the Firm Total Revenue TR = P x Q Average Revenue AR = P Marginal Revenue MR = Δ TR/Δ Q

The Profit of the Firm Short Run Maximum Profit MC = MR P > AC Minimum Loss MC = MR P > AVC Long Run Maximum Profit MC = MR P > AC