Prelim #2 Review - Laura Miller Economics 101 Prelim#2...

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Laura Miller Economics 101 Prelim #2 Chapter 13: The Costs of Production Total Revenue : the amount a firm received for the sale of its output Total Cost : the market value of inputs a firm uses in production o Includes implicit and explicit costs if thinking like an economist Profit : total revenue minus total cost Costs as Opportunity Costs Explicit Costs : input costs that require an outlay of money by the firm o Example: Helen hires workers to make cookies in her bakery and  thus she/the firm is required to pay out some money Implicit Costs : input costs that do not require an outlay of money by the  firm o Example: Helen could be working as a computer programmer  earning $100/hour but instead she is working more time at the  bakery.  She therefore gives up this $100/hour income and it is a  part of her costs. o Opportunity costs! The total cost of Helen’s business is the sum of the explicit costs and the  implicit costs Economists  include both  implicit + explicit  costs in order to determine  and analyze how firms make production and pricing decisions Accountants   on the other hand just consider the  explicit  costs because  they keep track of the money that flows in and out of a firm The Cost of Capital as an Opportunity Cost Economists would see an opportunity cost (a form of implicit cost) as a  part of the total costs
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Accountants would not see an opportunity cost as a part of the total costs  because no money flows out of the business to pay for it Economic Profit vs. Accounting Profit Economic Profit : total revenue minus total cost, including both explicit  and implicit costs o Important because it is what motivates the firms that supply goods  and services o Example: Joe quits his $10,000 job as a pants presser and opens  his own dry cleaning store.  His financial report for the past year  shows the following: Market value of the shop (beginning and  end of the year) o $50,000 Sales revenue of the shop o $25,000 Operating expenses o $5,000 If the market interest rate is 10%, an economist would say his  profits were:  $5,000 . Economic Profit—TR- TC, including both explicit and implicit costs TC= operating expenses + opportunity cost (salary) + 10% interest  rate of market value 25,000 -5,000 -10,000 -5,000 = $5,000 Accounting Profit : total revenue minus total explicit cost o Usually larger than economic profit o accounting profit > economic profit o To be successful from an economists’ standpoint, TR > explicit +  implicit costs
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Production and Costs We assume the size of factories is fixed and that we can vary the quantity 
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