The firm is an economic institution that transforms factors of production into consumer goods – it: Organizes factors of production. Produces goods and services. Sells produced goods and services.

1. The Production and Cost

5. Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue

8. A Production Table Number of workers Total output Marginal product Average product 4 6 7 6 5 3 1 0 -2 -5 1 2 3 4 5 6 7 8 9 10 0 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 — 4 10 17 23 28 31 32 32 30 25 0

9. Graphical Representation of TP, AP, and MP curves Output 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10 Number of workers TP Output per worker 1 2 3 4 5 6 7 8 9 10 Number of workers 7 6 5 4 3 2 1 0 MP (a) Total product (b) Marginal and average product AP

11. The Law of Diminishing Marginal Productivity Number of workers Total output Marginal product Average product Increasing marginal returns Diminishing marginal returns Diminishing absolute returns 4 6 7 6 5 3 1 0 -2 -5 1 2 3 4 5 6 7 8 9 10 0 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 — 4 10 17 23 28 31 32 32 30 25 0

12. The Law of Diminishing Marginal Productivity Output Diminishing marginal returns Diminishing absolute returns 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10 Increasing marginal returns Number of workers TP Output per worker 1 2 3 4 5 6 7 8 9 10 Number of workers 7 6 5 4 3 2 1 0 MP Diminishing marginal returns Diminishing absolute returns (a) Total product (b) Marginal and average product AP

15. Family of Total Costs Quantity Total Cost Fixed Cost Variable Cost 0 $ 3.00 $3.00 $ 0.00 1 3.30 3.00 0.30 2 3.80 3.00 0.80 3 4.50 3.00 1.50 4 5.40 3.00 2.40 5 6.50 3.00 3.50 6 7.80 3.00 4.80 7 9.30 3.00 6.30 8 11.00 3.00 8.00 9 12.90 3.00 9.90 10 15.00 3.00 12.00

19. Total Cost Curves Total cost $400 350 300 250 200 150 100 50 0 FC 2 4 6 8 10 20 30 Quantity of earrings VC TC TC = VC + FC M L O

22. Per Unit Output Cost Curves AFC AVC ATC MC Cost $30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 Quantity of earrings 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32

25. Relationship Between Marginal and Average Costs Costs per unit $90 80 70 60 50 40 30 20 10 0 Quantity 1 2 3 4 5 6 7 8 9 Area B Area A Area C MC ATC AVC Q 1 B AVC ATC MC Q 0 A

27. Average Total Cost in the Short and Long Runs... Quantity of Cars per Day 0 Average Total Cost ATC in short run with small factory ATC in short run with medium factory ATC in short run with large factory ATC in long run

28. Economies and Diseconomies of Scale Quantity of Cars per Day 0 Average Total Cost Diseconomies of scale ATC in long run Economies of scale Constant Returns to scale

30. Isoquant Curve for 60 Earrings

31. Isoquant Curve for 60 Earrings B A G C D F E Q 60 Units of labour Machines

34. Isoquant Map Q 40 Q 60 Q 100

36. Isocost Lines Slope = -P labour /P machines =-5/3 6 12 20 18 D A Units of labour Machines C

37. Combining Isoquant and Isocost Curves 20 12 MP labour /MP machines =P labour /P machines Q1 Q2 Units of labour Machines C A B