5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

The Firm, Profit, and the

Costs of Production

IN THIS CHAPTER

Summary:The previous chapter focused on the choices made by consumers

and how external forces and microeconomic policies affected those choices.

The chapter concluded with the concept of constrained utility maximization

and the utility maximizing rule. Also known as the consumer’s equilibrium,

it goes a long way toward explaining demand for goods and services. This

chapter examines much of the same but for firms, who are assumed to max-

imize profit by hiring the perfect combination of production inputs at the

lowest cost. First the firm is introduced, along with the importance of

opportunity costs and the economic view of profits. Then the short-run

production function and several principles that flow from production are

introduced. The discussion then turns to the short-run costs of employing

inputs and important principles associated with costs. In particular, these

concepts provide the foundation for the supply curve. Lastly, the analysis

is extended into the long run.

Key Ideas

JEconomic Profit

JShort Run versus Long Run

JProduction in the Short Run

JLaw of Diminishing Marginal Returns

JCosts in the Short Run

JCosts in the Long Run

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CHAPTER

8

KEY IDEA

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