Module 7: Production, Costs, and Industry Structure
Section outline
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This chapter is the first of four chapters that explores the theory of the firm. This theory explains how firms behave. What does that mean? Let’s define what we mean by the firm. A firm (or producer or business) combines inputs of labor, capital, land, and raw or finished component materials to produce outputs. These inputs carry costs. We'll discuss how firms determine theirs costs and desired profit levels, and what impacts each of those. Let's explore.
Upon completion of this module, you will be able to:
- Explain the difference between explicit costs and implicit costs
- Understand the relationship between cost and revenue
- Understand the concept of a production function
- Differentiate between the different types of inputs or factors in a production function
- Differentiate between fixed and variable inputs
- Differentiate between production in the short run and in the long run
- Differentiate between total and marginal product
- Understand the concept of diminishing marginal productivity
- Understand the relationship between production and costs
- Understand that every factor of production has a corresponding factor price
- Analyze short-run costs in terms of total cost, fixed cost, variable cost, marginal cost, and average cost
- Calculate average profit
- Evaluate patterns of costs to determine potential profit
- Understand how long run production differs from short run production.
- Calculate long run total cost
- Identify economies of scale, diseconomies of scale, and constant returns to scale Interpret graphs of long-run average cost curves and short-run average cost curves
- Analyze cost and production in the long run and short run.
To achieve these objectives: [Edit these items to match your resources and activities.]
- Read the Module 7 Introduction
- Read Chapter 7 in the course textbook, Microeconomics.
- Complete Module 7 Discussion.
- Complete Module 7 Quiz.
- Complete the Module 7 Assignment.
- For course instructor - List additional readings. [Include all reading assignments here that are outside of Moodle. Be as
concise as possible. More information can be included in the
third-party section below, if necessary.]
- Complete the [specific activities in the module. Include all in the order you want them completed.]
Module Pressbooks Resources and Activities
You will find the following resources and activities in this module at the Pressbooks website. Click on the links below to access or complete each item.
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Students mustMark as done
Chapter 7 of Microeconomics.
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Students mustMark as done
Module 7 In Class Activity (hide from students)
Course SLO 1: Identify the basic economic principles that serve as the foundation of economic analysis
Course SLO 2: Understand the interaction of supply and demand in determining prices and the role of prices in coordinating economic activity
Course SLO 6:Discuss the basic theories behind consumer and producer behavior
Course SLO 7: Analyze the performance of firms under different market structures
Module SLO: 6.1.3 – Explain marginal utility and the significance of diminishing marginal utility
Section 5 introduces economies of scale and dives into the difference between economies of scale, constant returns to scale, and diseconomies of scale. In this discussion, we will attempt to bring this to life by considering and speculating on real world firms. For this discussion, your task is to:
1. Pick a firm in the real world and explain whether you would think they would be considered in the range of economies of scale, diseconomies of scale, or constant returns to scale.
2. In your firm’s market, explain whether you think their market can support several firms that are sized differently or if their market must have identically (or nearly identically) sized firms and explain why this might be for your firm’s industry.
Instructor Notes:
The goal of this prompt is to have students to think about how this chapter applies to the world outside of the textbook. Firms in economies of scale will likely be small, and students can compare why larger firms can often sell goods at a lower price than smaller firms. If students look at very large firms, they may run into diseconomies of scale. To complete part 2, it will be useful for students to consider the market that a firm competes in.
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