7: Production, Costs, and Industry Structure
- Page ID
- 181239
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 7.0: Introduction
- This page explores key concepts of firm behavior, including explicit and implicit costs, and production in different time frames. It highlights Amazon's impact on the book-selling industry via its efficient model, enabling competitive pricing. The chapter also examines firm decision-making on product selection, production methods, and pricing while discussing market structures ranging from perfect competition to monopoly, along with the role of small businesses in the U.S. economy.
- 7.1: Explicit and Implicit Costs, and Accounting and Economic Profit
- This page discusses explicit and implicit costs, essential for differentiating accounting profit from economic profit in business. Explicit costs are direct expenditures, while implicit costs involve opportunity costs of owned resources. Using Eryn's potential legal practice as an example, it illustrates that despite a positive accounting profit, her economic profit may be negative when both cost types are considered.
- 7.2: Production in the Short Run
- This page explains production functions, emphasizing fixed versus variable inputs, short-run and long-run production, and concepts like total and marginal product, exemplified by pizza making. It details factors of production (natural resources, labor, capital, technology, entrepreneurship) and introduces the Law of Diminishing Marginal Product, highlighting initial output increases from added workers and eventual diminishing returns.
- 7.3: Costs in the Short Run
- This page explores the relationship between production and costs, detailing fixed and variable costs and their impact on total costs. It defines key concepts like average cost and marginal cost using a barber shop example, illustrating diminishing marginal productivity as more barbers are hired.
- 7.4: Production in the Long Run
- This page discusses the distinctions between short run and long run production. In the short run, a secretarial firm can only adjust labor while capital remains constant, resulting in diminishing returns beyond a certain number of workers. Conversely, in the long run, all factors can be adjusted, allowing for increased efficiency and productivity without diminishing returns as the firm can acquire more capital to support additional labor.
- 7.5: Costs in the Long Run
- This page covers long-run cost calculations for firms, emphasizing the role of production technology in minimizing expenses and achieving economies of scale. It discusses the impact of rising labor costs, the "six-tenths rule," and variations in the long-run average cost curve derived from short-run curves. Urbanization trends and their effects on firm size and competition are explored, including agglomeration economies.
- 7.6: Key Terms
- This page provides a comprehensive overview of economic concepts such as accounting and economic profit, explicit and implicit costs, average and marginal costs, and production functions. It discusses fixed and variable costs, economies and diseconomies of scale, productivity, and returns to scale, highlighting the differences between short-run and long-run production and the relationship between inputs and outputs within a firm.
- 7.7: Key Concepts and Summary
- This page explores economic concepts of costs and profits for private firms, distinguishing between accounting profit (explicit costs) and economic profit (explicit plus implicit costs). It explains short-run adjustments where only variable inputs like labor can change output, leading to diminishing marginal productivity. Costs are classified as fixed or variable, impacting decisions.
- 7.8: Self-Check Questions
- This page discusses economic issues related to a firm's profits, production costs, and decision-making processes in manufacturing. It outlines profit calculations based on revenue, fixed and variable costs, and marginal productivity, including exercises on total and average costs. The text also examines the long-term prospects for the automobile industry, focusing on economies of scale and market demand.
- 7.9: Review Questions
- This page covers economic concepts related to costs and production, distinguishing between explicit and implicit costs, and explaining accounting vs. economic profit. It details production functions, fixed and variable inputs, marginal product calculation, cost curves, and cost calculations.
- 7.10: Critical Thinking Questions
- This page covers key economic concepts related to firm operations, including the viability of unprofitable small firms, the effects of fixed costs on average costs, and the relationship between marginal cost and marginal product. It explores the shapes of cost curves, contrasts short-run and long-run operations, and examines how technological advancements influence long-run average costs.
- 7.11: Problems
- This page evaluates a firm's investment with a 6% return against a potential 8% loan, concluding the investment is advisable since the firm won’t borrow. It analyzes marginal gains and diminishing returns from barber numbers, computes different costs for producing haircuts, and examines a snow removal company's labor and capital methods, recommending the best approach based on current and increasing labor costs.