1. 1  The Role and Purpose of Firms (Producers)  Economic profit vs accounting profit.  Long-run and short-run production.  The law of diminishing marginal productivity.  Concepts of Cost  fixed costs  variable costs  total costs  average fixed costs  average variable costs  average total costs  marginal costs Production Theory and Concepts

2. 2 The Production--Supply Process In the supply process, people first bring factors of production to the market. In the supply process, people first bring factors of production to the market. Firms transform the factors into goods that consumers “want”. Firms transform the factors into goods that consumers “want”. is the transformation of factors into goods. Production is the transformation of factors into goods.

3. 3 The Role of Producers The firm is an economic institution that transforms factors of production into consumer goods. It: Organizes factors of production. Produces and sells goods and services. Knows how to do something A virtual firm only organizes production and subcontracts out all work.

4. 4 One goal of Firms – to Maximize Profit Profit = total revenue – total cost Economists and firms/accountants measure profit differently. Firms/Accountants focus on explicit costs and revenues. Economists focus on both explicit and implicit costs and revenue.

5. 5 Maximizing Profit Economic profit = (explicit and implicit revenue) – (explicit and implicit costs) Total revenue is the amount a firm receives for selling its good or service plus any increase in the value of its assets. Total cost is explicit payments to resources plus the opportunity cost of resources provided by the owners of the firm.

6. 6 Productivity Production function Production function Inputs and outputs Inputs and outputs Marginal output – product Marginal output – product Stages of Production Stages of Production Increasing Increasing Diminishing Diminishing Highest Highest Diminishing absolute production Diminishing absolute production

7. 7 A Production Function Both average and marginal productivities initially increase, but eventually they both decrease. The production function exhibits: Increasing marginal productivity Then diminishing marginal productivity Finally negative marginal productivity IIIIII