Microeconomics

Chapter 9
Prepared by Dr. L. Al-Khalifa

Econ 140
Chapter 9: Organizing Production

1. The firm
• A firm is an organization that hires factors of production and organizes them to produce
and sell goods and services.
• A firm’s goal is to maximize profit. Profit = total revenues – total costs

2. Economic profit
• The decisions firms make are based on opportunity cost and economic profit.
• Economic profit = Total revenues – all opportunity costs of production
• Opportunity costs are divided into explicit and implicit costs.
• Explicit costs are paid directly with money (rents and wages for examples)
• Implicit costs are not paid directly with money. They result from the uses of the capital,
the financial resources or the time of the owners of the firm.
• Implicit costs include:
1. Depreciation (the change in the capital value)
2. Interests forgone (when owners take their money out of the bank)
3. Normal profit (profit or income the owners gave up to run their business)

3. What are the firm's constraints that limit the profit?

1. Technology constraints
Technology is the method of production. Using the available technology, the firm
can produce more, only if it hires more resources, which will increase its costs and
limit the profit.

2. Information constraints
Information is never complete. To increase information, the firm conducts
expensive marketing research about the workforce, the demand and its competitors.

3. Market constraints
Firms are constraints by the willingness of consumers to pay for the firm's output
and the willingness of people to work for and invest in the firm. These are market
constraints. The expenditure firm pays to overcome market constraints limits its
profit.

4. What is the difference between technology and economic efficiency?

• Technological efficiency occurs when increasing output without increasing inputs is
impossible.
• Economic efficiency occurs when the cost of producing a given level of output is as low
as possible.
• An economically efficient production process also is technologically efficient.
• A technologically efficient process is not always economically efficient.
Example:
Technique Capital Labor
A 70 20
B 80 60
C 120 20
D 5 180

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 Microeconomics
Chapter 9
Prepared by Dr. L. Al-Khalifa

The above table gives you techniques the firm can use to produce 5 tons of good X.

A. Which technique(s) is (are) technologically inefficient?

B. If the cost of capital is 50 BD per unit and the cost of labor is 100 BD per unit, which
technique(s) is (are) economically efficient?

5. What are the different market structures?

A) Monopoly is a market structure in which one firm controls the market.

B) Oligopoly is a market structure in which a small number of firms compete.

C) Monopolistic competition is a market structure in which a large number of firms compete by

making similar but slightly different products (different brands of coffee for example).

D) Perfect competition is a market structure in which a large number of firms compete and
produce identical products.

6. Chapter 9 Quiz
1. A firm’s goal is to maximize its
a. revenue
b. costs
c. profit
d. none of the above

2. Which of the following ia an imxplicit cost of operating a business?

a. The wages paid to the workers.
b. The salaries paid to the owners.
c. The interest not earned on fund used to buy capital equipment.
d. The interest paid on a bank loan the owners incurred to help finance the company

3. which of the following is an explicit cost of operating a business?

a. The firm’s normal profit.
b. The firm’s economic profit
c. The firm’s economic depreciation.
d. The amount the firm pays to the Post Office to mail its bills.

4. which of the following constraints limits a firm’s profit?

a. Technology constraints.
b. Information constraints.
c. Market constraints.
d. All of the above limit a firm’s profit

5. Economic profit equals

a. total revenue minus total explicit costs and total implicit costs.
b. total revenue plus normal profit
c. total revenue minus total implicit costs

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 Microeconomics
Chapter 9
Prepared by Dr. L. Al-Khalifa
d. total revenue minus total explicit costs.

6. ___________efficiency occurs when the firm produces a given output by using the least
amount of inputs.
a. social
b. economic
c. technological
d. political

7. _________efficiency occurs when the firm produces a given output at the least cost.
a. social
b. economic
c. technological
d. political

8. A market structure in which a large number of firms compete by making similar but slightly
different products is a(n)………..
a. perfect competition
b. monopolistic competition
c. monopoly
d. oligoboly

9. A market structure in which a small number of firms compete is a(n)…………..

a. perfect competition
b. monopolistic competition
c. monopoly
d. oligoboly

Table 2
Method Labor Capital
1 5 10
2 10 7
3 15 5
4 20 5

10. Which is a technologically inefficient method of production?

a. Method 1 only b. Method 2 only
c. Method 3 only d. Method 4 only

11. If labor cost $10 per unit and capital $20 per unit, which is an economically efficient method
of production?
a. Method 1 only b. Method 2 only
c. Method 3 only d. All four methods are economically efficient

12. If labor cost $10 per unit and capital falls to $15 per unit, which is an economically efficient
method of production?
a. Method 1 only b. Method 2 only
c. Method 3 only d. All four methods are economically efficient