Class03_03

Class03_03 - 03/03/2008 Class Notes (cover part of Chapter...

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03/03/2008 Class Notes (cover part of Chapter 9 in the textbook) Class Outline Economic Profit vs. Accounting Profit Production Economic Profit vs. Accounting Profit Firm’s objective: Max Profit Profit= Revenue- Costs According to what we learned costs may have different nature. Thus we distinguish between two concepts of Profit: 1. Accounting Profit= Revenue- Explicit Costs 2. Economic Profit= Revenue- Economic Costs Example: From Table 1 we conclude that the Accounting profit for the printing company is $1,500,000. However, suppose that the owner’s best alternative to owning the printing company is working as an advertising executive for $2,000,000 per year. Table 1. Printing Company Revenues and Costs Annual Sales Revenues $4,000,000 Wages $1,500,000 Paper expenses $500,000 Rental payments for office space $150,000 Rental payments for printers’ use $350,000 Total Costs $2,500,000 1
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The economic profit accounts for the forgone wages. Precisely it equals the accounting profit- $2,000,000<0
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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Class03_03 - 03/03/2008 Class Notes (cover part of Chapter...

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