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Intro Marketing - Production costs Concepts economic profit...

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ECON 1001 LECTURE 7 1 Production costs Concepts - economic profit versus accounting profit - short versus long run - average and marginal product - law of diminishing returns - fixed and variable cost - fixed cost versus sunk cost - average cost and marginal cost - relationship between productivity and cost
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ECON 1001 LECTURE 7 2 Economic profit may differ from accounting profit - economic profits are revenues minus opportunity costs Opportunity costs include - explicit costs (that are not sunk) - forgone wages and interest earnings Accounting profits are revenues minus - all explicit costs
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ECON 1001 LECTURE 7 3 Total revenue - the amount a firm receives for the sale of its output Total cost – the amount a firm pays to buy the inputs of production Profit – total revenue minus total costs π = TR – TC Example: Helen uses $300 000 of savings, interest rate at 5 % Helen gives up $15 000 per year in interest No explicit cost – but it is an opportunity cost, so needs to be included in costs (and measures of economic profit). Zero economic profit – revenues just cover opportunity costs
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ECON 1001 LECTURE 7 4 Bazza decides to take open a restaurant. This requires Bazza to give up a job working as a lecturer at the university that pays $20 000 a year. Further, he needs to invest $50 000 of his savings into the business. The current rate of interest is 10 per cent per annum. In its first year, the restaurant has revenue of $200 000, rental costs of $50 000 and costs of food of $20 000. What is Bazza’s economic profit for the first year? (a) $95 000 (b) $105 000 (c) $125 000 (d) $130 000 (e) None of the above
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ECON 1001 LECTURE 7 5 Definitions of short and long run Short run – the period of time in which it is not possible to change all inputs of production (at least one input is fixed) Long run – the period of time long enough to change all inputs of of production
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