PPT On Introduction To Theory Of Firm

Presentation On Introduction To Theory Of Firm
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Introduction To Theory Of Firm Presentation Transcript:
1.Theory of firm

2.Introduction-need to study costs
Firms carry inventories which act as shock absorbers so production and sales never need to stop
There are three types: raw materials, intermediate (semi-finished) goods, and final goods
Inventories must be financed by working capital and require storage space

3.Types of cost-
Fixed cost-are associated with the fixed factor, usually capital, sometimes referred to as overhead cost
Variable cost-Costs which depend on the level of production
Total cost-Total cost is the sum of fixed and variable costs
Average cost -Average cost is total cost divided by quantity of output
Marginal cost-Cost of producing one extra unit of output

4.Costs
Total fixed costs (TFC)
Average fixed costs (AFC)
Total variable costs (TVC)
Average variable cost (AVC)
Total cost (TC)
Average total cost (ATC)
Marginal cost (MC)

5.Short-Run & Long-Run
“Time concepts”
Short-run:
One or more production input is fixed
Long-run:
The quantity of all necessary production inputs can be changed.
Expand or acquire additional inputs.

6.Fixed Costs
Result from owning a fixed input or resource.
Incurred even if the resource isn’t used.
Don’t change as the level of production changes (in the short run).
Exist only in the short run.
Not under the control of the manager in the short run.
The only way to avoid fixed costs is to sell the item.

7.Important Fixed Costs
Total fixed cost (TFC):
All costs associated with the fixed input.
               
                AFC=FC+VC

8.Variable Costs
Can be increased or decreased by the manager.
Variable costs will increase as production increases.
Total Variable cost  (TVC) is the summation of the individual variable costs.
VC  =  (the quantity of the input)  X  (the input’s price).
Variable costs exist in the short-run and long-run:
In fact, all costs are considered to be variable costs in the long run.

9.Important Variable Costs
Total variable cost (TVC):
All costs associated with the variable input.
Average variable cost per unit of output:
10.Total Cost
The sum of total fixed costs and total variable costs:
                                                                                                                                                 
TC  = TFC + TVC

In the short run TC will only increase as TVC increases.