CHAPTER 9: BACKGROUND TO SUPPLY: PRODUCTION AND COST
INTRODUCTION
In previous chapters we learned about the law of supply- in this Chapter we look at the theory
behind the supply curve (the theory of the firm)- and examine the firm’s decision on how
many units of a good to supply at each price…
9.1 INTRODUCTION
TYPES OF FIRMS
FORMAL:
Firms that are formally registered: P&P or Audi
INFORMAL:
Firms that are not formally registered: hawking, street vending, drugs
PRODUCTION happens (at a certain cost) …we look at production over the LONG run
(LR) or the SHORT run (SR).
*SR: At least one of the inputs is fixed
*LR: All inputs are variable
LECTURER NOTES | ECON 112
, 9.2 BASIC COST AND PROFIT CONCEPTS
GOAL of the firm is to MAXIMIZE profit
How? … Maximise the positive difference between …Total Revenue (TR) & Total Cost (TC)
TYPES OF PROFIT
Normal Profit
- Min profit
Accounting Profit
TR - Explicit Costs (e.g. money firm pay to buy production factors or other inputs)
Economic Profit
TR - (Implicit (i.e. opportunity cost)+ Explicit Costs)
Abnormal Profit
Profit > I + E
9.3 PRODUCTION IN THE SHORT RUN
SR-Assumptions
-1 product
-Homogenous, devisable
-Inputs can be divided and can be used in limitless qty’s.
-Fixed production function
-Fixed Price (inputs & product)
-Fixed inputs + 1 variable input (eg. labour)
LECTURER NOTES | ECON 112
INTRODUCTION
In previous chapters we learned about the law of supply- in this Chapter we look at the theory
behind the supply curve (the theory of the firm)- and examine the firm’s decision on how
many units of a good to supply at each price…
9.1 INTRODUCTION
TYPES OF FIRMS
FORMAL:
Firms that are formally registered: P&P or Audi
INFORMAL:
Firms that are not formally registered: hawking, street vending, drugs
PRODUCTION happens (at a certain cost) …we look at production over the LONG run
(LR) or the SHORT run (SR).
*SR: At least one of the inputs is fixed
*LR: All inputs are variable
LECTURER NOTES | ECON 112
, 9.2 BASIC COST AND PROFIT CONCEPTS
GOAL of the firm is to MAXIMIZE profit
How? … Maximise the positive difference between …Total Revenue (TR) & Total Cost (TC)
TYPES OF PROFIT
Normal Profit
- Min profit
Accounting Profit
TR - Explicit Costs (e.g. money firm pay to buy production factors or other inputs)
Economic Profit
TR - (Implicit (i.e. opportunity cost)+ Explicit Costs)
Abnormal Profit
Profit > I + E
9.3 PRODUCTION IN THE SHORT RUN
SR-Assumptions
-1 product
-Homogenous, devisable
-Inputs can be divided and can be used in limitless qty’s.
-Fixed production function
-Fixed Price (inputs & product)
-Fixed inputs + 1 variable input (eg. labour)
LECTURER NOTES | ECON 112
