# Chap_13 - TotalRevenue,TotalCost,Profit We assume that the...

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THE COSTS OF PRODUCTION 1 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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THE COSTS OF PRODUCTION 2 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. The cost of something is the highest value opportunity foregone. This is true whether the costs are implicit or explicit. Both matter for firms’ decisions. 0
THE COSTS OF PRODUCTION 3 Explicit vs. Implicit Costs:  An Example You need \$100,000 to start your business. The interest rate is 5%. Case 1: borrow \$100,000 explicit cost = \$5000 interest on loan Case 2: use \$40,000 of your savings, borrow the other \$60,000 explicit cost = \$3000 (5%) interest on the loan implicit cost = \$2000 (5%) foregone interest you could have earned on your \$40,000. 0 In both cases, total (exp + imp) costs are \$5000.

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THE COSTS OF PRODUCTION 4 Economic Profit  vs. Accounting Profit Accounting profit = total revenue minus total explicit costs Economic profit = total revenue minus total costs (including explicit and implicit costs) Accounting profit ignores implicit costs, so it’s higher than economic profit. 0
THE COSTS OF PRODUCTION 5 The Production Function A production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good. It can be represented by a table, equation, or graph. Example 1: Farmer Akira grows wheat. He has 5 acres of land. He can hire as many workers as he wants. 0

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THE COSTS OF PRODUCTION 6 0 500 1,000 1,500 2,000 2,500 3,000 0 1 2 3 4 5 No. of workers Quantity of output Ex 1:  Farmer Akira’s Production Function 3000 5 2800 4 2400 3 1800 2 1000 1 0 0 Q (bushels of wheat) L (no. of workers) 0
THE COSTS OF PRODUCTION 7 Marginal Product If Akira hires one more worker, his output rises by the marginal product of labor .

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