THE THEORY OF PRODUCER BEHAVIOUR
FIRM
Definition: A firm is an organization that conducts business activities with the aim of making a profit
Business activities
Production
Marketing
Finance
Human resources
Infomation
Profit = Total Revenue – Total Cost
Π = TR – TC
Production Function
A production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good.
Q or TP = A.Kα.Lβ
Short Run: at least one input is held constant/fixed
Production in the Short Run: K is fixed input and L is variable input
Q or TP = f(L)
Long Run: all inputs may become variable
Production function in the Long Run: Q or TP = f(K,L)
Isoquant; Isocost
Production optimization
MPL/w=MPK/r
wL+rK=C=TC
Returns to scale
Increasing returns to scale (Economies of scale)
Constant returns to scale
Decreasing returns to scale (Diseconomies of scale)
Cost
Accounting profit = Total revenue - accounting costs
Economic profit = Total revenue - economic costs
Economic costs = Accounting costs + Opportunity costs
Cost in short run
Cost in long run
Condition for profit maximization of a firm: MR=MC