1. Costs of production
1.1. Implicit and explicit costs
1.1.1. Explicit costs: are those directly related to production and are the physical payments for the factors of production, such as wages, rent and interest.
1.1.2. Implicit costs: are the risks taken and sacrifices made by person or people starting a new business, also known as opportunity cost.
1.2. Costs in the short run
1.2.1. Fixed costs don`t change with output.
1.2.2. Variable costs change with output.
1.2.3. Fixed costs + Variable costs = Total cost
1.2.4. If the factors of production are not increasing the outputs, then the average cost will increase, as well as the marginal ones.
1.2.5. MC=TC Difference/Q Difference
1.2.6. AC=TC/Q
1.3. Costs in the lung run
1.3.1. There is only a long run average cost
1.3.2. As firms grow they are able to increase return to scale, slowly reducing the average production cost
1.3.3. Reasons for increasing return to scale
1.3.3.1. Specialization and expertise: As the firms grows the manager and employees will improve their performance running the firm.
1.3.3.2. Improved efficiency: arger firms are able to work better with their suppliers and negotiate better deals, and are able to buy in bulk at much lower prices.
1.3.3.3. Marketing: For larger firms having a name in the market to get new customers is easy, and they also can afford bigger saling campings.
1.3.3.4. Indivisibilities: some equipment and machinery needed is so large and expensive that only a large firm can afford it.
1.3.4. Reasons for decreasing return to scale
1.3.4.1. Coordination difficulties:Large firms have to be very formal in their way of operating, and there may often be a large distance between the lowest level of employees and the top executives.
1.3.4.2. Poor communication: In smaller companies the communication between the top executives and the employees, usually is easier, faster and more direct.
2. Revenue
2.1. Price * Quantity = Total revenue
2.1.1. Marginal revenue: is the rate of change of revenue with each additional unit of output.
2.1.2. MR = TR Difference / Q Difference
2.1.3. Average revenue: is just another word for selling price per unit.
2.1.4. AR = TR / Q
2.2. The ability to set prices
2.2.1. The prices are established by supply and demand.
2.2.2. Imperfect competition: Any firm that faces a downward sloping demand curve is a firm that has some degree of power.
2.2.2.1. The firms have a great power over the prices.
2.2.3. Perfect competition is a market structure in which the large number of firms, complete homogeneity of goods, lack of barriers to entry and exit and the perfect information available about goods means that firms have no price setting ability themselves.
2.2.3.1. The customers and competition have a great power over the prices.
3. Goals of Firms
3.1. Growth Maximization
3.1.1. Trying to achieve a bigger market share, in order to have more dominance in the market.
3.1.2. Predatory pricing refers to firms charging very low prices in order to gain more market share in the industry. It may involve sacrificing profits or even incurring a loss.
3.2. Revenue Maximization
3.2.1. An alternative objective may be to maximise revenue instead. In order to maximize profit in the long run.
3.2.1.1. When the MR=0, the TR is at its highest point.
3.2.1.2. If MR is positive, then TR is increasing; and if MR is negative, TR is decreasing.
3.3. Profit maximation
3.3.1. We make the assumption that all the corporation's main goal is to maximize their profit.
3.3.1.1. Maximum profits mean that the owners or shareholders get the most back on their original investment.
3.3.1.2. The firms can use these profits to fund research and development, thereby securing a place in the market.
3.3.1.3. The firms can increase and set better salaries and working conditions, in order to incentivize their employees.
3.4. Profit Satisfaction
3.4.1. This goal consists on the companies that accepts being under they maximum profit.
3.4.2. Satisficing behaviour refers to accepting or being satisfied with a lower level of profits.
3.4.3. The principal-agent problem refers to the objectives of the owners of a firm and objectives of the firm's managers being different.
3.5. Corporate social responsibility
3.5.1. Is the responsibility a company has to protect and improved their society.
3.5.2. Examples: Eco friendly decisions, not harming local communities, providing good salaries for locals.
3.6. Marginal revenue=slope of Total Revenue
3.6.1. Firms are looking forward to have a relationship of MR>MC
3.7. Marginal cost=slope of Total Cost
4. Market structure
4.1. Market competition
4.2. Monopoly
4.3. Oligopoly
4.4. Monopolistic competition
5. Poduction
5.1. Key questions: Employ more labour? Buy more machines? Purchase a new factory, office or shop? Hire a new manager? Buy more land?
5.2. Short run = production is fixed. Long run = production is variable.
5.3. The law of diminishing marginal returns
5.3.1. Increasing the factors of production (employees) will increase productivity and production, until a certain where the productivity of each employee will start to decrease.
5.3.2. Average product=(Total product)/(Units of variable input)
5.3.3. Marginal Product=(Total product difference)/(Units of variable input difference)
5.4. Relationship between the curves
5.4.1. The intersection between average product and marginal product occurs at average product's highest point.
5.4.2. (TP Difference/input Difference)=(Tp2-Tp1)/(qi2-qi1)=m
5.4.3. The marginal product is equal to the slope of the parabola
6. Profit
6.1. Making economic profit
6.1.1. A firm will make zero economic profit when the price equals average total cost. It is said to be breaking even.
6.1.2. The break even point is when the total costs equal the total revenue. After that point, all the extra revenue is translated into profit.
6.2. Normal profit: is made when total revenue is equal to the total economic cost.
6.3. Abnormal profits: is when total revenue exceeds economic cost
6.4. Making negative economic profit
6.4.1. A firm will make negative economic profit, or a loss, when the price is below minimum average total cost.
6.4.2. Which means that they didn't achieve the break even point.
6.5. Shutdown decisions in the short run
6.5.1. A firm will shut down when the price falls below minimum average variable cost.
6.5.2. Companies can afford to close a quarter in negative numbers, having in mind they most compensate this results in the following ones.
6.6. TF=TR-TC
6.6.1. (AR – AC) x Q=TR