> > > > The Behavior of Profit-Maximizing Firms Profits and Economic Costs Short-Run Versus Long-Run Decisions The Bases of Decisions: Market Price of Outputs, Available Technology, and Input Prices The Production Process Production Functions: Total Product, Marginal Product, and Average Product Production Functions with Two Variable Factors of Production Choice of Technology

Production, the process by which inputs are combined, transformed, and turned into outputs.

demand Firms demand factors of production in input markets and supply supply goods and services in output markets.

firm is an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. profit. Most firms exist to make a profit. Production is not limited to firms.

Perfect competition is an industry structure in which there are: many firms, each small relative to the industry, producing virtually identical products and in which no firm is large enough to have any control over prices. in perfectly competitive industries, new competitors can freely enter and exit the market.

Homogeneous products are undifferentiated products; products that are identical to, or indistinguishable from, one another. In a perfectly competitive market, individual firms are price-takers. Firms have no control over price; price is determined by the interaction of market supply and demand.

The perfectly competitive firm faces a perfectly elastic demand curve for its product.

All firms must make several basic decisions to achieve what we assume to be their primary objective—maximum profits. How much output to supply 1. Which production technology to use 2. How much of each input to demand 3.

Profit (economic profit) is the difference between total revenue and total economic cost. Total revenue is the amount received from the sale of the product:

Total cost (total economic cost) is the total of Accounting costs (Explicit or out-of-pocket costs): involve a direct money outlay for factors of production. Economic costs (Implicit costs): do not involve a direct money outlay. They include the full opportunity cost of every input

The most important opportunity cost is that is included in economic cost is the opportunity cost of capital. Rate of return is the annual flow of net income generated by an investment expressed as a percentage of the total investment. The normal rate of return is a rate of return on capital that is just sufficient to keep owners and investors satisfied.

The short run is a period of time in which the quantity of some inputs, called fixed inputs can not be changed. A fixed factor is usually an element of capital (such as plant and equipment), but it might be land or the supply of skilled labor. variable factors Inputs that can be varied in the short run are called variable factors.

The long run is a period of time for which there are no fixed factors of production. Firms can increase or decrease all inputs.

The fundamental things to know with the objective of maximizing profit are: The market price of the output 1. The techniques of production that are available 2. The prices of inputs 3.

Price of outputProduction techniquesInput prices Determines total revenue Determine total cost and optimal method of production Total revenue  Total cost with optimal method =Total profit The optimal method of production is the method that minimizes cost.

The production function or total product function is a numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.

(1) LABOR UNITS (EMPLOYEES) (2) TOTAL PRODUCT (SANDWICHES PER HOUR) (3) MARGINAL PRODUCT OF LABOR (4) AVERAGE PRODUCT OF LABOR

Marginal product is the additional output that can be produced by adding one more unit of a specific input, ceteris paribus.

The law of diminishing marginal returns or marginal product states that: When additional units of a variable input are added to fixed inputs, the marginal product of the variable input declines. Example: As more and more workers (variable input) are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment (fixed input).

Average product is the average amount produced by each unit of a variable input.

Marginal product is the slope of the total product function. At point A, the slope of the total product function is highest; thus, marginal product is highest. At point C, total product is maximum, the slope of the total product function is zero, and marginal product intersects the horizontal axis.

If marginal product is above average product, the average rises. If marginal product is below average product, the average falls. When average product is maximum, average product and marginal product are equal.

Cost-Minimizing Choice Among Alternative Technologies (100 T-Shirts) (1) TECHNOLOGY (2) UNITS OF CAPITAL (K) (3) UNITS OF LABOR (L) (4) COST WHEN P L = $1 P K = $1 (5) COST WHEN P L = $5 P K = $1 A210$12$52 B36933 C44824 D63921 E

Production technology refers to the quantitative relationship between inputs and outputs. A labor-intensive technology relies heavily on human labor instead of capital. A capital-intensive technology relies heavily on capital instead of human labor.

Two things determine the cost of production: Technologies that are available Input prices. Profit-maximizing firms will choose the technology that minimizes the cost of production given input prices.