2025 Firms and Decisions (1) Production Cost ACJC

© ACJC Economics Dept/JC1/2025/H2 Firms & Decisions (1) – Production & Costs 1 Section Content Page 1 Objectives of Firms 3 1.1 Primary Objective of Firms: Profit Maximization 3 2 Decisions by Firms: Production and Cost Concepts 6 2.1 Production And Cost Concepts 6 3 Short-Run Cost of Production 8 3.1 Total Cost 8 3.2 Marginal Cost 8 3.3 Average Cost 9 4 Long-Run Cost of Production 10 4.1 Internal Economies and Diseconomies of Scale 11 4.2 Minimum Efficient Scale of Production 13 4.3 External Economies and Diseconomies of Scale 16 Learning Reflection & Annex 19 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/JC1/2025/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. 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 competition. 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. This topic also analyses the behaviour of firms and whether the resulting outcomes are desirable in terms of efficiency, equity and product’s quality and variety. LEARNING OUTCOMES Enduring Understanding: • Profit is the difference between total revenue and total cost, with Economic profit tak