Chapter 13

Chapter 13 - Chapter 13 Cost of Production What are Costs...

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Chapter 13; Cost of Production What are Costs? Total Revenue, Total Cost, and Profit We assume that firms want to maximize cost Total Revenue: the amount a firm receives for the sale of its outputs Total Cost: The market value of inputs a firm uses in production Profit= Total revenue - Total Cost Total revenue equal the quantity of outputs the firm produces time the price at which is sells the output Cost as Opportunity Costs Explicit Cost: input cost that require an outlay of money by the firm Example: Paying wages to work Implicit Cost that do not require an outlay of money by the firm Example: Opportunity cost of owner’s time The cost of something is what you give up to get it! Economic Profit vs. Accounting Profit Accountants keep track of how much money flows into and out of the firm, so they ignore implicit costs Economists study the pricing and production decisions of firm, which are affected by implicit as well as explicit costs Accounting Profit = Total Revenue – Total Explicit Costs Economic Profit = Total Revenue – Total Cost (including explicit and implicit costs) The Cost of Capital as an Opportunity Cost An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business
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Chapter 13 - Chapter 13 Cost of Production What are Costs...

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