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Supply Side - Bryan L Boulier Economics 101 Handout 5 The...

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Bryan L. Boulier Economics 101 Handout 5: The Supply Side & Short Run Costs I. Introduction Definition of Firm: Firms are institutions that transform resources into goods purchased by consumers, other firms and government. Components of Firms: 1. Owners - receive profits and bear losses 2. Managers - day-to-day decisionmaking 3. Workers 4. Assets Organization: 1. Sole proprietorship 2. Partnership 3. Corporation Goals of Firms: 1. Profit maximization 2. Other goals We will focus on profit-maximization as a goal. A. Predicts behavior of firms well B. Managers compensation tied to profits of firms C. Survival hypothesis: Firms can not indefinitely incur losses. Firms that do go out of business, so that surviving firms are dominated by those that have managed to have adequate profitability.
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II. Accounting vs. Economic Profits 1. Accounting Profit Accounting Profit = Total Revenue - Explicit Costs Explicit costs = Explicit payments for inputs used in the production process. 2. Economic Profit Economic Profit = Total Revenue - Economic Costs Economic costs = All costs of production (or value of all resources used in
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