3/03 - Economic profit =0 therefore accounting profit>0...

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3/03/08 Theory of the Firm The main objective is to determine why supply curves slope up. How does a firm choose its Q? All firms do everything they do so as to maximize profit. That implies that it is our job to figure out the pattern between one more unit of output, and what will happen to profit. “Good Will”- your name on something people value Two distinct challenges arise 1. What is meant by profit? There are two types of profit, Accounting profit and Economic profit Economic Profit is the total revenue – the implicit cost(next best cost) – explicit cost Accounting Profit is the total revenue – the cost directly associated with the business (explicit costs) Accounting profit=0 therefore Economic profit<0
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Unformatted text preview: Economic profit =0 therefore accounting profit>0 2. Assemble the pattern indirectly Profit=TR –TC All we need is a pattern linking output and total cost. Trouble is, we don’t know what happens. We do know what happens to cost if one more hour of labor is used by one guy. If we can figure a pattern between labor usage and output, simple arithmetic will tell us the pattern between output and cost. There is a pattern (2x) depending on the frame. Short Run Long Run Unable to raise or lower Is able to raise or lower the size of the factory the size of the factory This means the existence If Q=0, he exited the industry Of fixed cost In the short run there is a definite pattern...
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