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Unformatted text preview: Exam 2- Reading Notes 20:27 The Cost of production Industrial Organization- the study of how firms decisions about prices and quantities depend on the market conditions they face How does the number of firms affect the prices in a market and the efficiency of the market outcome? A firms costs are a key determinant of its production and pricing decisions What are Costs? Firms Objective- economists normally assume that the goal of a firm is to maximize profit Total revenue- the amount a firm receives for the sale of its output Total Revenue= the quantity of output the firm produces x the price at which it sells its output Total cost- the market value of the inputs a firm uses in production Profit= total revenue - total cost Costs as Opportunity Costs When measuring costs, keep in mind: The cost of something is what you give up to get it Opportunity cost- all the things that must be forgone to acquire an item Explicit costs- input costs that require an outlay of money by the firm (ingredients, wages, etc) Implicit costs- input costs that do not require an outlay of money by the firm (forgone income, etc) Total cost= explicit costs + implicit costs The Cost of Capital as an Opportunity Cost Opportunity cost of the invested capital (implicit) Economic Profit versus Accounting Profit Economic profit= total revenue total cost (including both explicit and implicit costs) Accounting profit= total revenue total explicit cost (excluding both explicit and implicit) Pro a business to be profitable from an economists standpoint, total revenue must cover all the opportunity costs (implicit and explicit) Economic profit- what motivates the firms that supply goods and services Production and Costs...
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- Summer '07