Theory of the Firm: Production, Profits & Costs
I.
Business Organizations
A.
Proprietorship- a firm with a single owner; unlimited
liability; tax responsibility flows through to the owner on the
individual tax return
B.
Partnership- a firm with two or more owners; unlimited
liability, tax responsibility flows through to the owners’ personal
tax return
C.
Corporation- a firm with one or more owners that is a
separate entity from the owner/s; limited liability; taxed separate
from the owner; double taxation of profits
II.
Market Models
A.
Perfect Competition-many buyers and sellers; identical
products; no barriers to entry
B.
Monopolistic Competition-many buyers and sellers;
differentiated products; no barriers to entry
C.
Oligopoly- a few large firms; identical or differentiated
products; may have barriers to entry
D.
Monopoly- single seller of a unique product; barriers to
entry
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Theory of the Firm: Production, Profits & Costs
III.
Economic & Accounting Profit (π)
A.
Explicit Costs- direct monetary costs
B.
Implicit Costs-costs measured in money but not paid for
directly with money; opportunity costs
C.
Accounting Profit
D.
Economic Profit
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Theory of the Firm: Production, Profits & Costs
IV.
Production
A.
Time
A.
Short-Run
B.
Long-Run
B.
Production Function
C.
Marginal Product of Labor (MPL)
D.
Average Product of Labor (APL)
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Theory of the Firm: Production, Profits & Costs
E.
V.
Law of Diminishing Returns
Total Cost Functions
A.
Total Costs (TC)
B.
Total Fixed Costs (TFC)-are independent of the level of output
produced
C.
Total Variable Costs (TVC)- depend on the level of output
produced
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Theory of the Firm: Production, Profits & Costs
D.
Average Total Costs (ATC)
E.
Average Fixed Costs (AFC)
F.
Average Variable Costs (AVC)
G.
Marginal Cost (MC)- additional cost of producing one more unit
of output
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Theory of the Firm: Production, Profits & Costs
VI.
Costs in the Long-Run
A.
Long-Run Average Cost Curve
B.
Economies of Scale-occur as long run average cost decrease
as output increases; doubling inputs more than doubles output
C.
Diseconomies of Scale- occur as long run average cost
increase as output increases; doubling inputs less than doubles
output
D.
Constant Returns to Scale-occur as long run average cost
stays the same as output increases; doubling inputs doubles
output
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Theory of the Firm: Production, Profits & Costs
Labor
0
1
2
3
4
5
6
Output
(Q)
0
200
450
550
600
625
640
Total
Fixed
Cost
$800
800
800
800
800
800
800
Total
Variable
Cost
$0
650
Total
Cost
$
Average
Fixed
Cost
$-
Average
Variable
Cost
$-
Average
Total
Cost
$-
Marginal
Cost
Margi
Produ
$-
-
Each worker cost $650
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