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Unformatted text preview: ECON1110 TA Section 9 Professor Jennifer Wissink TA Jingxian Zheng March 26, 2009 1 Concepts Review 1. Short Run Total Costs and Economic Profit • Explicit Costs v.s. Implicit Costs SRTC = SRVC+FC, can be: Explicit Costs : ones that go through a market transaction. e.g., wage rent, materials. Implicit Costs opportunity cost of owned factors. (Not make actual payments) e.g., a firm’s use of its own capital, time, land...(Otherwise they could have been rented to another firm instead.) • Economic Profit v.s. Accounting Profit Economic Profit = Total Revenue- Total Costs = Total Revenue- Explicit Costs- Im- plicit Costs Accounting Profit = Total Revenue - Explicit Costs 2. Short Run Profit Maximization in A Perfectly Competitive Output Market • Rules for profit maximization in the short rum: ‹ MR( Q * )=SRMC( Q * ). See Graph 1 Profit( Q )= Total revenue( Q )- SRTC( Q ), so marginal profit( Q )=MR( Q )-SRMC( Q ). If Q < Q * , MR( Q ) is greater than SRMC( Q ), marginal profit is positive, so by increasing Q , profit will increase. If Q > Q * , MR( Q ) is less than SRMC( Q ), marginal profit is negative, so by decreasing Q , profit will increase. So neither Q > Q * nor Q < Q * maximizes profit. So π is maximized when MR( Q * )=SRMC( Q * ). › π ( Q * ) is a maximum and not a minimum. Usually there are more than one Q satisfying MR( Q * )=SRMC( Q * ). Only the Q where SRMC intersects MR from below is the one that maximizes Q ....
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- Fall '08
- Economics, Economic Profit, shut down