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introecon_Presentation - Announcements Microeconomic Review...

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1 1 Microeconomic Review 2 Cornell University Read syllabus PS #1 answers available Sunday Form teams of 3-4 for CSG No class Tuesday Announcements 3 Cornell University Review of business economics Economic vs. accounting profits Costs Demand Profit maximization Long-run and short-run decisions Agenda 4 Cornell University The Good News: This is the key to every problem for the rest of the for the next few weeks The Bad News: TR and TC will get complicated in a hurry (e.g., TR might depend on how competitors react to your price changes) Let’s consider costs and revenues separately… Profit ( Π ): A Firm’s Goal Π = T otal R evenue – T otal C ost
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2 5 Cornell University Accounting profits = TR - accounting costs Economic profits = TR - economic costs Accounting tracks money retrospectively: where did it come from, where did it go? Accountants are less willing to recognize undocumented costs, e.g., opportunity costs Accountants unwilling to ignore expenditures Two kinds of profits 6 Cornell University Opportunity costs are the revenue lost had the resource been employed elsewhere Opportunity cost of attending Cornell? Opportunity cost to Blockbuster of a DVD returned late? Why do Colorado farmers sell their water rights? Economic profit = TR - opportunity cost of inputs Thus, opportunity costs are the only costs that affect decisions! Strictly speaking, if there’s no opportunity cost, the asset costs nothing (causes no loss). Opportunity Costs 7 Cornell University Jane starts a software company. Her revenues are $1 million and she paid $850k for hired labor. What is her accounting profit? Jane quit her job at Oracle, where she made $200k a year, to start her firm.
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