Chapter 13 The Cost of Production

Chapter 13 The Cost of Production - Chapter 13 The Cost of...

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Chapter 13 The Cost of Production Total revenue, total cost, profit We assume the firm’s goal is to maximize profit Profit = total revenue – total cost Total revenue is the amount a firm receives from the sale of its output and total cost is the market value of the inputs a firm uses in production Costs: explicit Vs. implicit Explicit costs : require an outlay of money, e.g. paying wages to workers. Implicit costs: do not require a cash outlay, e.g. the opportunity cost of the owner’s time. Economic Profit Vs. Accounting Profit Accounting Profit : total revenue minus total explicit costs Economic profit : total revenue minus total costs (including explicit and implicit costs) Accounting profit ignores implicit costs, so it’s higher than economic profit. The Production Function Production Function : shows the relationship between the quantity of inputs used to produce a good and the quantity of outputs of that good.
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