Lecture Outlines

Lecture Outlines - Lecture Outlines Production Costs...

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Lecture Outlines Production Costs Reading: Chapter 7 of Tucker Overview: Costs and Profit Short-Run Production Costs and Cost Formulas Marginal Cost Relationships Long-Run Production Costs Different Scales of Production Costs and Profit Except for not-for-profit entities such as the North Coast Co-op, the motivation for business decisions is profit maximization. Profit maximization helps explain why managers or firms choose a particular level of output or price. The total opportunity cost of a business is the sum of explicit costs and implicit costs. o Explicit costs : Payments to non-owners of a firm for their resources. For example, wages, rent, utilities, etc. o Implicit costs : The opportunity costs of using resources owned by the firm. No actual payment is made to outsiders. There are three definitions for profit -- everyday, Accounting, and Economic. 1. "Profit" in everyday use is defined as: Profit = total revenue - total cost 2. Economists call this "Accounting Profit." They define it as: Accounting profit = total revenue - total explicit cost
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Accounting practice tends to overstate profit, however, because implicit costs are not included. 3. In order to include both explicit and implicit costs, economists use "Economic Profit." It is defined as: Economic profit = total revenue - total opportunity costs Normal Profit: The minimum profit necessary to keep a firm in operation. A firm that earns normal profit earns total revenue equal to its total opportunity cost. Short-Run Production Costs Economists distinguish short-run and long-run time horizons based on the ability to vary the quantity of inputs or resources used in production. There are two type of inputs to be considered: 1. Fixed Input : Any resource for which the quantity cannot change during
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This note was uploaded on 11/21/2011 for the course BUS 210 taught by Professor Sevier during the Fall '08 term at Emory.

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Lecture Outlines - Lecture Outlines Production Costs...

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