15th lecture

15th lecture - Economics 101 Lecture 15 Adam Smith and the...

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Unformatted text preview: Economics 101 Lecture 15 Adam Smith and the Wealth of Nations The Money Quote . It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages. Another One Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Different Types of Profit Profit = Total revenue - Total cost Accounting profit = Total revenue - Explicit costs Economic profit = Total revenue - All costs (implicit and explicit) Normal profit = the opportunity cost of the resources owned by the firm Accounting Profit Explicit costs Explicit costs Economic profit Normal profit= opportunity cost of resources supplied by owners of firm Total revenue Example 15.4 . Cullen Buffet runs a miniature golf course in Odessa, Texas. He rents the course and equipment from a large recreational supply company, for which he pays a monthly fee of $1000. He supplies his own labor, and considers the job of running the golf course just as attractive as his only other employment opportunity, working in a grocery store at a salary of $800/mo. Monthly revenue from ticket sales is $2000/ mo. What at is Cullen's accounting profit? His economic profit? Accounting profit = $2000 - $1000 = $1000/mo. Economic profit = $2000 - $1000 - $800 = $200/mo. Example 15.5 . Now suppose Cullen learns that his Uncle Warren has died and left him this parcel of land in New York City. 59th Street 58th Street Fifth Ave Sixth Ave The land has been cleared, and Cullen discovers that a construction company is willing to install and maintain a miniature golf course on it for a payment of $4000/month. A market survey reveals that he would collect $16,000/month in revenue by operating a miniature golf course there. The cost of living in New York is the same as in Odessa. If Cullen opens a golf course on the Manhattan site, what will be his accounting profit? Accounting profit = $16,000 - $4000 = $12,000/mo Example 15.6 . Suppose Cullen's land would sell for $100,000,000 in today's real estate market, and suppose that the interest rate is 1%/month....
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15th lecture - Economics 101 Lecture 15 Adam Smith and the...

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