Lecture 14 Feb 27 exam 2

Lecture 14 Feb 27 exam 2 - Announcements MT1 grades are on...

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Announcements MT1 grades are on Blackboard Curve=2 points Drop deadline is Monday There is no HW due on Monday. The next HW (ch 7) will be due after break. You should do it before you leave for break if you can – EVERYONE is required to do it. After break we’ll be very busy. 1 of 33
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THE THEORY OF THE FIRM (chs 7-10) 2 of 33
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Firms What is a firm? Economists view a firm as a bundle of contracts. The firm is a black box; you put stuff in and get stuff out. A firm is a web of contracts between input suppliers and the owner(s). These contracts allow the firm to transform inputs (land, labor, capital, and entrepreneurial ability) into output (goods and services). 3 of 33 production The process by which inputs are combined, transformed, and turned into outputs.
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4 of 33 Firms What the book says (in ch. 3): firms Economic units formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale. (ch3 has stuff about types of firms. We don’t need to distinguish here)
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Firms What do firms do? 1.Make stuff (produce goods and services) 1.Maximize PROFITS For this class, we assume that all firms are in business to maximize profits. PROFITS= total revenue – total costs. Or, in short hand π = TR-TC . Where TR=P*Q (a negative profit is called a loss) 5 of 33
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Accountants vs. Economists Accountants and economists use the same equation for profits : π = TR-TC. BUT, the two measure COSTS differently. Accountants consider only EXPLICIT costs (where money changes hands). Whereas economists count both EXPLICIT and IMPLICIT costs. The concept of an implicit cost is very similar to the concept of opportunity cost. 6 of 33
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Costs Remember that a cost implies a sacrifice. In order to get something, you have to give up something else (opportunity cost). When looking at costs, economists take into account other opportunities that the firm is forgoing when it decides to produce something. 7 of 33
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Example A lemonade stand sells 15,000 cups of lemonade at a price of $2.00 per cup. Here is the accountant’s profit/loss statement. 8 of 33 Total Revenue (TR) (15,000*$2)=$30,000 Costs: Lemons $1,000 Sugar $500 Water $500 Salary $20,000 Total Costs (TC) $22,000 Accounting Profit (TR-TC) $30,000-$22,000=$8,000
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Example So what would an economist do differently? The differences arise from how economists determine costs. The economist asks the owner of the lemonade stand what he would have done if he did not run a stand. The owner says he would have gotten a job at Wendy’s and made $24,000. An economist uses this as the value of the owner’s next best alternative. The owner’s labor is just as much an input as the lemons and the sugar. 9 of 33
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Example Economists believe the “cost” of the owner’s labor is the opportunity forgone, in this case the market value of the job at Wendy’s.
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This note was uploaded on 08/15/2011 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture 14 Feb 27 exam 2 - Announcements MT1 grades are on...

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