Focus on how firms behave and make decisions regarding costs and prices.
Important for students as this is often a challenging part of microeconomics.
Course covers Chapters 12, 13, and parts of 14 within one week.
Importance of Studying Firm Decisions
Understanding firm decisions is crucial for context in economics.
Statistics on Firms in Canada
Definitions of firm sizes:
Small Firms: 1 - 99 employees
Medium Firms: 100 - 499 employees
Large Firms: 500+ employees
Small Businesses: 98% of businesses in Canada
Medium-sized Firms: 1.9% of Canadian businesses
Large Enterprises: 0.2% of Canadian businesses
Contribution of small businesses to GDP: 37% in the private sector.
Approximately 52,663 establishments in Canada export goods worth over $575 billion.
In the U.S., small businesses are 99.7% of all firms, playing a significant role in production and pricing decisions.
Understanding Firm Behavior
Firm Production Function
Firms use inputs to create outputs (Q = function of inputs).
Inputs include:
Raw materials
Physical capital
Human capital (labor)
Focus is on desirable outputs for these chapters.
Marginal Analysis
Explore how output changes with the change in one input for ease of analysis (limit to two inputs).
Short-run vs. Long-run:
Short-run: Capital is inelastic (fixed); firms can only increase labor.
Long-run: Both capital and labor can be adjusted.
Rule: As long as marginal benefits exceed marginal costs, firms should expand production.
Production Function Example: Wheat Production
Firm production function includes inputs like:
Natural and manufactured capital
Human capital (farmers, labor)
Inputs like land are considered fixed inputs that constrain production in the short run.
Total Product and Marginal Product
Total Product (TP): Maximum output produced at varying levels of input.
The concept of Marginal Product (MP): The change in total product with a unit change in input.
MP can increase initially but will begin to diminish.
If marginal product becomes zero or negative, firms should not add more inputs.
Production Stages
Stages of production include:
Increasing returns
Constant returns
Decreasing returns
Economic behaviors may shift or differ across businesses; these stages can change over time.
Production Costs
Types of Costs
Fixed Costs: Costs that do not change in the short term and do not vary with production volume (e.g., rent, equipment).
Variable Costs: Costs that fluctuate with production levels (e.g., utilities, wages).
Break-even point: Where total revenue equals total costs; important for operational decisions.
Cost Formulas
**Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)
Average Costs:**
Average Fixed Cost (AFC) = TFC / Quantity (Q)
Average Variable Cost (AVC) = TVC / Q
Average Total Cost (ATC) = TC / Q
Marginal Cost (MC): Change in TC when producing one more unit of output = Change in TC / Change in Q.
Cost Curves
Cost curves illustrate relationships between average costs and marginal costs.
Marginal cost curves will always intersect the average cost curves at their minimum point.
Summary of Cost Curves
Average total cost (ATC) dips then rises in a U-shaped curve.
Average variable cost (AVC) follows a similar U-shaped trend but is always below ATC.
Marginal cost curves intersect both average cost curves at their respective minimum points.
Example Problem: Costs of Production
Fixed costs: $10 (unchanging).
Total Costs = TFC + TVC; Average variable cost and average total cost calculations must consider fixed and variable relationships.
Graphs and Charts
Important to be able to graph and differentiate between these curves for your assessments.
Key Takeaway
Understanding the models and functions of firm behavior, costs, production inputs and outputs is essential in microeconomics for practical applications in business and economic policy.