13 Cost of Production Lecture SV

13 Cost of Production Lecture SV -...

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1 CHAPTER 13 THE COSTS OF PRODUCTION Total Revenue, Total Cost, Profit We assume that the firm’s goal is to maximize profit . Profit = Total revenue Total cost the amount a firm receives from the sale of its output the market value of the inputs a firm uses in production 0
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2 CHAPTER 13 THE COSTS OF PRODUCTION Costs:  Explicit vs. Implicit Explicit costs – require an outlay of money, e.g. paying wages to workers Implicit costs – do not require a cash outlay, e.g. the opportunity cost of the owner’s time Remember one of the Ten Principles: The cost of something is what you give up to get it . This is true whether the costs are implicit or explicit. Both matter for firms’ decisions. 0
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3 CHAPTER 13 THE COSTS OF PRODUCTION Some Cases where costs are implicit Use of the firm’s or the owners’ internal funds (e.g. reinvested profits) Self-employed owners Durable assets Opportunity costs of using the machine is the fall in the resale values of them. Rental rate can be used to assess the costs.
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4 CHAPTER 13 THE COSTS OF PRODUCTION Economic Profit  vs. Accounting Profit Accounting profit = total revenue minus total explicit costs Hw questions ch9 # 4 ch 10 # 3,?,8 Economic profit = total revenue minus total costs (including explicit and implicit costs) 0
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5 CHAPTER 13 THE COSTS OF PRODUCTION Revenue Total opportunity costs How an Economist Views a Firm How an Accountant Views a Firm Revenue Economic profit Implicit costs Explicit costs Explicit costs Accounting profit
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6 CHAPTER 13 THE COSTS OF PRODUCTION Economic profit vs. Accounting profit Economic profit is always less than the accounting profit. zero economic profit: means that the firms are just making a normal rate of return equal to the return on alternative investments.
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A A     C C     T T     I I     V V     E  L E  L     E E     A A     R R     N N     I I     N N     G   G   1 1 :    :    Economic profit vs. accounting profit Economic profit vs. accounting profit The equilibrium rent on office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if a. you rent your office space b. you own your office space 7
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A A     C C     T T     I I     V V     E  L E  L     E E     A A     R R     N N     I I     N N     G  1 G  1 :    :    Answers Answers The rent on office space increases $500/month. a. You rent your office space. Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month. b. You own your office space. Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month.
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This note was uploaded on 11/28/2010 for the course ECON 200 taught by Professor Newton during the Fall '08 term at Ohio State.

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13 Cost of Production Lecture SV -...

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