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Unformatted text preview: 1 Chapter 12 The Costs of Production We assume that the firm’s goal is to maximize profit. Profit = Total revenue – Total cost ¡ Total revenue Quantity of output times the price at which the output is sold ¡ 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 Example You need $100,000 to start your business. The interest rate is 5%. Scenario 1: borrow $100,000 Scenario 2: use $40,000 of your savings, borrow the other $60,000 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 A production function shows the relationship between the quantity of inputs used to produce a good, and the quantity of output of that good Assumption for short run: Inputs are fixed; the only input that is variable is labor. Econ 1 Fall 2008 Week 6 2 Example 1: ¡ Farmer Jack grows wheat....
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This note was uploaded on 01/04/2009 for the course ECON 1 taught by Professor Crane during the Fall '08 term at UC Irvine.
- Fall '08