ch9 - Organizing Production The Firm and Its Economic...

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Chapter 9 Organizing Production The Firm and Its Economic Problem A firm is an institution that hires factors of production and organizes those factors to produce and sell goods and services. A firm’s goal is to maximize profit. The opportunity cost of any action is the highest-valued alternative forgone. A firm’s opportunity cost has two components: o Explicit costs o Implicit costs Explicit costs are paid directly in money. A firm incurs implicit costs when it forgoes an alternative action but does not make a payment. A firm incurs implicit costs when it: o Uses its own capital. o Uses its owner’s time or financial resources. The rental income forgone is the firm’s opportunity cost of using its own capital. This opportunity cost is called the implicit rental rate of capital. The implicit rental rate of capital is made up of economic depreciation and interest forgone. Economic depreciation is the change in the market value of capital over a given period. The return to entrepreneurship is profit, and the return that an entrepreneur can expect to receive on the average is called normal profit . A firm’s economic profit is equal to its total revenue minus its opportunity cost. The firm’s opportunity cost is the sum of its explicit costs and implicit costs, and implicit costs include normal profit . Study Table 9.1 on p. 199 of your text, which summarizes economic accounting
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ch9 - Organizing Production The Firm and Its Economic...

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