12 What’s Behind the Supply Curve

12 What’s Behind the Supply Curve - Whats...

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What’s Behind the Supply Curve 2/17/11 11:59 PM Total Revenue, Total Cost & Profit We assume that the firm’s goal is to maximize profit o May not always be the case, may be trying to maximize sales revenue, popularity Profit=Total revenue-Total cost o Total revenue : the amount a firm receives from the sale of its output o Total cost : the market value of the inputs a firm uses in production o Cost is not the same as price Price is what the firm charges, what consumers pay Good for the firm Costs: Explicit vs. Implicit Explicit costs require an outlay of money (i.e. paying wages to workers) Implicit costs do not require a cash outlay (i.e. the OC of the owner’s time) Both matter for firm’s decisions Example o Need $100,000 to start your business, interest rate is 5% Case 1: borrow $100,000 Explicit cost= $5000 interest on loan Case 2: Use $40000 of your savings, borrowing the other $60000 Explicit cost= $3000 (5%) interest on the loan Implicit cost = $2000 (5%) interest you could have earned on your $40000
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