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ch06_condensed - Micro 101 Chapter 6 1 Chapter 6 Theory of...

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Micro 101, Chapter 6 1 Chapter 6 Theory of Supply need objective function of the firm - e.g., max profits = total revenue – total costs π = TR TC today: focus on costs recall: cost implies sacrifice accounting costs vs. economic costs important more complete first step assessment Example: lemonade stand Q=15,000 glasses sold P= \$2/glass Accounting Profit Statement Total Revenue 15,000 * \$2 \$30,000 Costs Lemons 1,000 Sugar 500 Water 500 Salary for assistant 10,000 Total cost \$_____ Accounting Profit (TR – TC) \$_____

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Micro 101, Chapter 6 2 Economic Profit Statement Total Revenue 15,000 *\$2 \$30,000 Explicit Costs Lemons 1,000 Sugar 500 Water 500 Salary for assistant 10,000 Total Explicit/ Contractual Cost \$12,000 Implicit Costs Own Labor 24,000 Land 5,000 Total Implicit Costs \$29,000 Total Economic Costs \$ _______ Economic Profit \$ _______ Main points: (1) economists calculate the cost of everything used in the production, including ________ costs (2) the yardstick economists use in calculating implicit costs is the value of the most lucrative opportunity forgone: opportunity cost (3) for some implicit costs, may need to “impute” a dollar value Ex. If add power lines, may be giving up a nice view of the lake
Micro 101, Chapter 6 3 - difficult to calculate value, but should try Examples. .. cost of attending a movie > ticket price cost of using an inherited farm for growing corn - depends on alternative uses

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Micro 101, Chapter 6 4 Why do people go to college at age 18 vs. later at
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ch06_condensed - Micro 101 Chapter 6 1 Chapter 6 Theory of...

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