Ch. 6 Notes Businesses and Their Costs
Ch. 6 Notes Businesses and Their Costs Econ 1051
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This 3 page Class Notes was uploaded by Lauren Pike on Monday September 21, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 54 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 09/21/15
Ch 6 Business and Their Costs The Business Pooulation 0 plant establishment farm factory mine store website that performs one or more functions in fabricating and distributing goodsservices 0 firm org that employs resources to produce goodsservices for profit and operate 1 or more plants industry group of firms that produce samesimilar products org structure of firms 0 multiplantfirms org horizontally several plants performing same function I ex Coke bottling plants and Walmart stores 0 vertically integrate own plants that perform many different functions in same chain of production I ex Shell owns oil fields refineries and gas stations 0 conglomerate have plants that produce products in several different industries I ex Pfizer makes medicine gum razors mints Advantages of Corporations 0 most effective form of business for raising to finance expansions 0 selling of bonds and stocks to pool financial resources of large number of people 0 stock ownership of shares of corp 0 bond certificates indicating obligations to pay principal and interest on loans at specific time in the future 0 provide limited liability to owners risk only what they paid for stock PrincipalAgent Problem 0 PA problem conflict of interest that occurs when agents managers pursue their own objectives to the detriment of the principals stockholders goals Economic Costs 0 economic cost payment that must be made to obtain and retain services of a resource 0 econ costs explicit implicit costs 0 2 types 0 explicit costs payments firms must make to an outsider to obtain a resource monetary payments 0 implicit costs income firm must sacrifice when it uses a resource in the market value of next best use I also opp costs 0 Accounting and Normal Profit 0 accounting profit TR total revenue of firm explicit costs 0 normal profit payment that must be made by firm to obtain and retain entrepreneurial ability 0 econ profit subtracting all econ costs from revenue 0 Short Run and Long Run short run period too brief for firm to alter plant capacity but long enough to permit change in degree to which fixed plant is used I fixed capacity I variable output long run period long enough to adjust qtys of all resources I some firms leave industry I all costs variable I all inputs variable 0 Short Run Production relationships 0 O O marginal product extra output associated w adding unit of variable resource 2 A total product MP A labor output total product average product output per unit of labor input mm oflabor law of diminishing returns I tech fixed I successive units of variable resource added to fixed resource MP will eventually decline 0 Short Run Production Costs 0 0 fixed costs costs that don t change when firm changes output variable costs change w output level total cost TFCtotal fixed cost TVCtotal TC 2 TFC TVC variable cost 39 TFC per unIt average costs Q output average variable cost A VC 2 L56 average total cost ATC TQC 39 ATC marginal cost MC AQ O O O 0 when MC lt ATC ATC will decrease MC gt ATC ATC will increase at point where MCATC ATC has ceased to fall but not started to rise MC intersects ATC curve at min 0 Long Run Production Costs 0 0 industry can make all desired resource adjustments long run ATC curve made up of segments of short run ATC curves I shows lowest ATC at which any output level can be produced after firm has time for appropriate adjustments to plant size Economies and Diseconomies of Scale 0 econ of scale reduction in ATC of producing a product as firm expands size of operations in long run I greater labor specialization I managerial specialization I efficient capital disecon of scale increase in ATC of producing a product as firm expands size of operations in long run I difficulty in efficiency of controllingcoordinating firm s operations as it becomes larger I increase in inputs causes less than proportionate increase in output 0 ex input increases 10 and output increases 5 constant returns to scale no changes in ATC of producing product as firm expands operations minimum efficiency scale MES lowest level of output at which firms can minimize long run ATC
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