ACJC Firms and Decisions (1) Production Cost

© ACJC Economics Dept/JC1/2023/H2 Firms & Decisions (1) – Production & Costs 1 Section Content Page 1 Objectives of Firms 4 1.1 Primary Objective of Firms: Profit Maximization 5 1.2 Alternative Objectives of Firms 7 2 Decisions by Firms: Production and Cost Concepts 9 2.1 Production And Cost Concepts 9 3 Short-Run Cost of Production 10 3.1 Total Cost 10 3.2 Marginal Cost 11 3.3 Average Cost 11 4 Long-Run Cost of Production 13 4.1 Internal Economies and Diseconomies of Scale 13 4.2 Minimum Efficient Scale of Production 16 4.3 External Economies and Diseconomies of Scale 18 Learning Reflection & Annex 21 Reference Texts: 1. Case, Fair and Oster. Principles of Economics, Special Edition for ACJC, Pearson, 2013. Chapters 7-9 2. John Sloman. Economics, 8th Edition, Prentice Hall. Chapter 5. 3. Mankiw, Quah & Wilson. Principles of Economics, an Asian Edition, CENGAGE Learning. Chapter 13 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics H2 Firms and Decisions (1) PRODUCTION & COSTS

© ACJC Economics Dept/JC1/2023/H2 Firms & Decisions (1) – Production & Costs 2 WHAT IS THIS TOPIC ABOUT? In the free market economy, resources are allocated through the price mechanism, i.e. forces of demand and supply. The topic “Firms and How They Operate” examines issues related to resource allocation and resource utilisation from the perspective of firms. This topic gives you a better understanding of what decisions lie behind the supply curve in a market . This topic is divided into two main sections: (1) Production & Costs (2) Market Structure Firms allocate resources to produce goods and services, with the aim of making profit. Profit is the difference between revenue earned from the sale of the goods and the cost incurred in producing the goods. i.e. Profit = Total Revenue – Total Cost Section (1), Production & Costs, begins with the examination of production behaviour of firms since firms are primarily the agent that is responsible for transforming input s (i.e. resources) into output s (i.e. goods and services) for consumers. From production behaviour, we will go on to determine how cost varies when firms decide to adjust its output in the short run and in the long run. This topic also examines issues pertaining to firms such as mergers, outsourcing and off-shoring. In Section (2), Market Structure, we then examine the concept of revenue (what firms get when they sell an output), and highlight the difference between average revenue and marginal revenue of firms in perfectly competitive markets as well as markets with imperfect c ompetition. With the knowledge of cost and revenue, we can derive the firm’s profit. This section then examines what is meant by “profit” and the different types of profit. LEARNING OUTCOMES Enduring Understanding:  Profit is the difference between total revenue and total cost, with Economic profit taking Opportunity Cost into account  In