Jul 22, 2017

Production and Costs in the Short Run

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Production and Costs in the Short Run (mod 4 case)


Module 4 - Background


Production and Costs in the Short Run

In microeconomics, we assume that all firms operate to maximize profit. Profit is calculated by subtracting total costs from total revenue. In the short-run, a firm has fixed and variable costs. We assume that labor is variable (workers can be hired and fired at any time) while capital is fixed (usually capital such as factory equipment, rent on a wherehouse is on a timed lease).

Required Reading

Bouman, John. Principles of Microeconomics. "Unit 5: Cost Functions" Retrieved from: http://www.inflateyourmind.com/pdfs/microeconomics.pdf

Bouman, John. () Principles of Microeconomics. "Unit 6: Profit maximization of a Purely Competitive Firm" (Sections 1-6 only) Retrieved from:http://www.inflateyourmind.com/pdfs/microeconomics.pdf

Note: This chapter will be used in module 5 as well.

PowerPoint Presentations

Supply and Production This PDF file takes a few seconds to download.

Costs of Production

Other Resources

Economics Web Institute. Costs. Retrieved from:http://www.economicswebinstitute.org/glossary/costs.htm

Note: All readings were validated on March 17, 2013.

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Module 4 - Case


Case Assignment

In this assignment, please review the reference material:

In a 3-page essay, address the following questions:

  1. Give a brief summary of economic costs.
  2. Suppose a firm is operating at the minimum point of its short-run average total cost curve, so that marginal cost equals average total cost. Under what circumstances would it choose to alter the size of its plant? Explain.
  3. In the short-run, why might a firm still operate even when there is a loss?
  4. Suppose a firm is producing 1,000 units of output (Q). Its average fixed costs are $50. Its average variable costs are $25. What is the total cost (TC) of producing 1,000 units of output (Q)? It the price (P) of the good is $100, what is total revenue? What is total profit?

Assignment Expectations

Use concepts from the modular background readings as well as any good-quality resources you can find. Be sure to cite all sources within the text and provide a reference list at the end of the paper.

Length: 3 pages double-spaced and typed.

The following items will be assessed in particular:

  • Your ability to understand the relationship between costs and production.
  • Some in-text references to the modular background material (APA formatting required).
  • The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings.

When your paper is done, send it in.


Answer the following question in a 4 sentences


In the study of economics, we always assume the firm operates to maximize profits. One way to do this is to minimize costs. Many firms have outsourced to other countries in order to reduce costs of production. Discuss some advantages and disadvantages of outsourcing.


This should be answer after the references have been noted

Economics Module 4 CaseNameInstructorCourseDate1. There are numerous costs that producers of various products and services encounter in their operations aiming at making profits and expanding their activities. These costs are categorized in the short-run and long-run depending on their nature and other features (Mukherjee et al., 2003; Tisdell & Hartley, 2008). These costs are based on the economic notion that in the short-run, the firm is faced with two types of costs, which are fixed and variable costs respectively. These indicate that there are those aspects whose costs can be adjusted while there are those that remain fixed at least during this period. According to Baumol Blinder (2012), the long-run is characterized by costs that are variable in nature in the sense that the firm has enough time to weigh its options regarding factors of production to facilitate productivity, efficiency, and profitability. Some of the costs that a firm faces include total costs, average total costs, average variable costs, and average fixed costs among others depending on the nature and features of the activities. Total costs refer to the entire amount of costs incurred in facilitating production services. It entails the additional of all costs incurred without leaving out any aspect. Total average costs refer to the summation of all the costs incurred divided by the number of units of products produced. Variable costs refer to the costs incurred by employing variable factors of production. Variable costs are those whose quantities can be altered to suit the requirements of the production process (Nicholson & Snyder, 2012). Fixed costs are those attached to long-term and permanent assets like equipments and land at least in the short-run. Average fixed costs are obtained after dividing the summation of fixed costs by the number of fixed items in question. Average varied costs refer to the quotient of varied costs and the number of items summing up the variable factors of production. Nicholson & Snyder (2012) argue that marginal cost refers to the cost that a firm has to incur in its attempt to produce an extra unit of output.2. The firm w...

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