Production and cost 2017 - Chapter 9 Mohr The Firm and Its...

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Chapter 9 Mohr
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The Firm and Its Economic Problem Pgs 143 - 145 A firm is an institution that hires factors of production and organizes them to produce and sell goods and services. The Firm’s Goal A firm’s goal is to maximize profit. Measuring a Firm’s Profit Economists measure profit based on an opportunity cost measure of cost. Types of firms Individual proprietorships, partnerships, companies, close corporations. Principal – agent problem Asymmetric information
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Opportunity Cost A firm’s decisions respond to opportunity cost and economic profit. A firm’s opportunity cost of producing a good is the best, forgone alternative use of its factors of production, usually measured in rands. Opportunity cost includes: Explicit costs Implicit costs Cost of Owner’s Resources
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Economic Profit pg 148 Economic profit equals a firm’s total revenue minus its total cost. A firm’s total cost of production is the sum of the explicit costs and implicit costs. Normal profit is part of the firm’s total costs, so economic profit is profit over and above normal profit. π (profit) = R (total revenue) – C (total costs)
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Explicit and Implicit Costs pg 146 & 149 Explicit : ‘Accounting costs’ Implicit : Imputed Payments for inputs that firm does not own e.g. - Materials, labour, repayments, rent. Opportunity cost of owner's inputs (f.o.p) - e.g. the owners land, labour etc -These inputs have alternative uses -Opp Cost = income that
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Example Thandi’s Textbooks business R/mt h Thandi’s salary in next best job 1000 0 Use of Thandi’s premises 3000 Use of Thandi’s capital (i) R100 000 @6% 6000 Materials and expenses 8000 Assistant’s wage 5000 Economic costs Implicit costs Explicit costs
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Accountant’s and Economist’s concept of Accounta nt Economi st Normal profit N = OC of owner’s FOP N a cost of the Accounting profit = R – explicit costs Economic or Pure profit = R – explicit costs – implicit costs Minimum to keep firm in a given industry
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Example Aviwe runs a small business – Economists R Us. Use the following information about his business to work out the economic and accounting profit for his business. Assistant (Musa) Rent Raw materials Investment in the business Annual interest on R40 000 Salary at a rival firm Entrepreneurial talents The total revenue R18 000 R10 000 R20 000 R40 000 R4 000 R15 000 R3 000 R70 000 Explicit costs Implicit costs AC EC /loss = = = = Should Aviwe stay in business or close down?
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MCQ questions ECO1110S test 2016 Investment in the business (which accrues an interest of 10% per annum) R12 000 Rent R2000 per month Assistant wage R550 per week Raw material R1000 per week Saadiq’s salary at a rival firm R5000 per month Total revenue R20 000 per month Saadiq starts a new business EconoLab selling textbook and resource materials to first year students at UCT. He incurs the following cost: What is Saadiq’s monthly accounting and economic profit?
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