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ProductionandCostAnalysisI.ppt

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ProductionandCostAnalysisI.ppt

2003 McGraw-Hill Ryerson Limited.Production and Cost Analysis IChapter 9 2003 McGraw-Hill Ryerson Limited9 - 2Introductionu In the supply process, people first offer the factors of production they control to the market.l Then the factors are transformed by firms into goods that consumers want.l Production occurs when factors of production inputs transform into goods and services. 2003 McGraw-Hill Ryerson Limited9 - 3Firms Maximize Profitu Firm’s goal is to maximize profit.u Profit is the difference between total revenue and total cost.Profit Total revenue – Total cost 2003 McGraw-Hill Ryerson Limited9 - 4Firms Maximize Profitu An accountant will calculate profit by subtracting explicit costs from the revenue.u For an economist,the measure of profit is revenues minus both implicit and explicit costs. 2003 McGraw-Hill Ryerson Limited9 - 5Firms Maximize Profitu Implicit costs include the opportunity costs of the factors of production.Economic profit Revenue – Implicit costs Explicit costs 2003 McGraw-Hill Ryerson Limited9 - 6The Production Process u The production process is generally divided into a long run planning decision and the short run adjustment decision. 2003 McGraw-Hill Ryerson Limited9 - 7The Long Run and the Short Runu A long-run decision is a decision in which the firm can choose the least expensive method of producing from among all possible production techniques. 2003 McGraw-Hill Ryerson Limited9 - 8The Long Run and the Short Runu A short-run decision is one in which the firm is constrained by past choices in regard to what production decisions it can make. 2003 McGraw-Hill Ryerson Limited9 - 9The Long Run and the Short Runu The terms long run and short run do not necessarily refer to specific periods of time.u They refer to the degree of flexibility the firm has in changing the level of output. 2003 McGraw-Hill Ryerson Limited9 - 10The Long Run and the Short Run u In the long runl By definition, the firm can vary the inputs as much as it wants.l All inputs are variable.

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