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Lecture 15

# Lecture 15 - Announcements MT1 grades are on Blackboard...

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Announcements MT1 grades are on Blackboard Curve=6 points Drop deadline is today MT2 is being moved from Wednesday Oct. 29 to Friday Oct. 31. There is a HW due on Monday – everyone is required to do it. 1 of 31

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2 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS PROFITS AND ECONOMIC COSTS profit (economic profit) The difference between total revenue and total (economic) cost. profit = total revenue - total cost total revenue The amount received from the sale of the product ( q x P ).
3 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS PROFITS AND ECONOMIC COSTS total cost (total economic cost) The total of (1) out- of-pocket costs, (2) normal rate of return on capital, and (3) opportunity cost of each factor of production. economic profit = total revenue - total economic cost The term profit will from here on refer to economic profit . So whenever we say profit = total revenue - total cost, what we really mean is

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Calculating Total Revenue, Total Cost, and Profit INITIAL INVESTMENT: MARKET INTEREST RATE AVAILABLE: \$20,000 0.10 OR 10% Total revenue (3,000 belts x \$10 each) \$30,000 Costs Belts from Supplier 15,000 Labor cost 14,000 Normal return/Opportunity Cost of Capital (\$20,000 x 0.10) 2,000 Total Cost \$31,000 Profit = total revenue - total cost - 1,000 4 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS normal profit (sometimes called zero profit) The accounting profit earned when all resources earn their opportunity cost. Any accounting profit in excess of “normal profit” is consider “economic profit”.
5 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS All firms must make three basic decisions to achieve what we assume to be their primary objective— maximum profits. The Three Decisions That All Firms Must Make 1. How much output to supply 2. Which production technology to use 3. How much of each input to demand

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6 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS THE BASES OF DECISIONS: MARKET PRICE OF OUTPUTS, AVAILABLE TECHNOLOGY, AND INPUT PRICES The bases of decision making: 1. The market price of output 2. The techniques of production that are available 3. The prices of inputs Output price determines potential revenues. The techniques available tell me how much of each input I need, and input prices tell me how much they will cost. Together, the available production techniques and the prices of inputs determine costs.
7 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS optimal method of production The production method that minimizes cost. Input prices Determines total revenue Determine total cost and optimal method of production Production techniques Price of output Total revenue - Total cost with optimal method = Total profit Determining the Optimal Method of Production

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Before getting into the nitty-gritty of the firm’s decision, let’s consider the firm’s problem in a way that looks a lot like the consumer’s utility-maximization problem.
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