Unit 5: The Producer
In this unit we learn about one of the most important economic agents: the producer. The producer (a company or firm) is responsible for creating the production function (output) and is subject to various cost measures and the results of diminishing returns. We explore these ideas more fully as we delve into the relationship between quantity of input and quantity of output. We will discuss how and why a firm's costs may differ in the short run versus the long run.
Completing this unit should take you approximately 8 hours.
Upon successful completion of this unit, you will be able to:
- analyze how the producer applies the marginal decision rule to maximize profit in producing goods or services when combining factors of production – labor, capital, and natural resources – in both the short-run and long-run;
- describe the short-run and long-run costs of production;
- explain how the long-run average cost curve relates to economies and diseconomies of scale; and
- use product and cost curves to analyze how a producer's marginal returns are increasing, diminishing, or negative.
5.1: The Short Run
Read this section on production cost. It will provide you with the needed definitions and some mathematical analysis of the topics for Unit 5.
Read this section to learn about the behavior of the producer in the short run. Attempt the "Try It" problems at the end of the section before checking your answers. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.
Read this section about how to calculate costs in the short-run like variable and marginal costs. Make sure to answer the "Try It" questions.
Read the Introduction in Chapter 7 and click through to Section 7.1. and 7.2 to learn about the short-run analysis in production. Pay attention to the difference between accounting and economic profit. Also, from section 7.2, pay special attention to how fixed costs that do not change in the short-run affect average total cost and average variable costs.
Watch this video about how a coffee shop owner decides whether to keep is shop open or take another job, At the end of the video, consider the role of opportunity costs and how they affect business decisions. Think about times you've had to make choices and how opportunity costs affected those decisions.
Watch this video about a firm's marginal product revenue curve. Make sure that you understand the relationship among the marginal product of labor, the total product curve, and the total revenue curve.
Watch this video about economic profit versus accounting profit. Make sure that you understand that in economics, there are indirect expenses to consider. An example of an indirect expense is the wage when a self-employed owner does not earn somewhere else because he/she puts all their time into running their business and gives up earning an income somewhere else. That indirect expense, or opportunity cost, should be taken into account for determining the economic profit from running that business as a self-employed person.
Watch this video about depreciation and the opportunity cost of capital. Calculating the depreciation of capital, such as equipment that is used in production, is a common method in accounting for determining the cost of that capital used in production.
Watch this video about how a baker decides whether to keep her bakery open or to close. At the end of the video, consider the role of costs and how they affect business decisions. Think about examples of businesses which have chosen to shut down.
Watch this video about fixed, variable, and marginal cost. Make sure that you go back to the main reading in Unit 5.1 to learn about these concepts in detail. It is especially the case that variable costs are those that change in the short-term, like wages. And fixed costs are those that cannot normally change in the short-run, like the rental payment for leasing property that is used in the production process.
Watch this video about how the average cost and marginal cost curves are determined and shown in a graph.
Watch this video to continue learning about how the marginal cost curve and the average total cost curve are determined and depicted in a graph. If you need to review this topic, make sure to go back to the main reading in Unit 5.1.
Watch this video to learn how the marginal revenue curve and the marginal cost curve are determined and depicted in a graph. Note that the market production will be in equilibrium when the marginal revenue is equal to the marginal cost.
Watch this video about marginal revenue below average total cost. Pay special attention in that video when it mentions the difference between the short-run and the long-run supply curve.
5.2: The Long Run
Read this section to learn about the behavior of the producer in the long run. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of the section before checking your answers.
Watch this video about the long-term supply curve and economic profit. Pay special attention in this video when it shows the point of "shut down" for a producer.
Read these sections to learn about the long-run analysis in production. Pay attention to economies of scale and to the long-run average cost curve.
Unit 5 Review
Study these lecture notes to review producer theory and to take a look at how production functions and cost functions can be derived mathematically.