Unit 4. The firms and the production IES Lluís de Requesens (Molins de Rei)‏ Batxillerat Social Economics (CLIL) – Innovació en Llengües Estrangeres Jordi Franch Parella

The objectives of the firm The main objective of a firm are the profits

Profit = Total Revenue – Total Costs Total Revenue: the amount that a firm receives for the sale of its output Total Costs: the market value of the inputs that a firm uses in production From an economic point of view, total costs include both explicit and implicit (cost of opportunity). From an accounting point of view, total costs are only the explicit costs.

Production The production shows the relationship between the quantity of inputs to make a good and the quantity of output. Three definitions (total, average and marginal)‏ Average product = TP / L Marginal product = Δ TP / Δ L The marginal product diminishes at a certain point

Total Production

Costs - Three different definitions: Total Costs, Average Costs, Marginal Costs. - Total Costs = Fixed Costs + Variable Costs - Average Total Costs = Total Costs / q - AFC = FC / q - AVC = VC / q - Marginal Costs = Δ TC / Δ q

Total Costs

Variable Costs

Marginal Cost

Economies of Scale With economies of scale, long-term average total cost falls as the output increases With diseconomies of scale, long-term average total cost rises as the output increases With constant returns to scale, long-term average total cost remains the same as the output increases