9-CostofProduction

9-CostofProduction - 9. Cost of Production (Chapter 13)...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
9. Cost of Production (Chapter 13) Introductory Microeconomics, Mankiw et al. 5th Canadian Edition Introduction to Microeconomics (ECO 1104F) University of Ottawa
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9. Cost of Production 2 Look for the answers to these questions: 1. What is a production function? What is marginal product? How are they related? 2. What are the various costs, and how are they related to each other and to output? 3. How are costs different in the short run vs. the long run? 4. What are “economies of scale”?
Background image of page 2
9. Cost of Production 3 Total Revenue, Total Cost, Profit We assume that the firm’s goal is to maximize profit . Profit = Total revenue Total cost the amount a firm receives from the sale of its output the market value of the inputs a firm uses in production
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9. Cost of Production 4 Costs: Explicit vs. Implicit Explicit costs require an outlay of money (e .g. paying wages to workers) Implicit costs do not require a cash outlay ( e.g. the opportunity cost of the owner’s time) Remember one of the Ten Principles: The cost of something is what you give up to get it . This is true whether the costs are implicit or explicit. Both matter for firms’ decisions.
Background image of page 4
9. Cost of Production 5 Explicit vs. Implicit Costs: An Example You need $100,000 to start your business. The interest rate is 5%. Case 1: borrow $100,000 explicit cost = $5,000 interest on loan Case 2: use $40,000 of your savings and borrow the other $60,000 explicit cost = $3,000 (5%) interest on the loan implicit cost = $2,000 (5%) foregone interest you could have earned on your $40,000. In both cases, total (explicit and implicit) costs are $5,000.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9. Cost of Production 6 Economic Profit vs. Accounting Profit Accounting profit = total revenue minus total explicit costs Economic profit = total revenue minus total costs (including explicit and implicit costs) Accounting profit ignores implicit costs, so it’s higher than economic 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.
Background image of page 6
Economic Cost and Profit Source: Parkin and Bade “Introduction to Microeconomics
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Economic Cost and Profit Normal profit is an implicit cost. Accountants measure cost as explicit costs and accounting depreciation.
Background image of page 8
9. Cost of Production 9 Your Turn: Economic profit vs. accounting profit The equilibrium rent on office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if you a) rent your office space b) own your office space
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Your Turn: Economic profit vs. accounting profit The rent on office space increases $500/month. a) You rent your office space. Explicit costs increase $500/month. Accounting profit & economic profit each fall 500/month.
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/21/2012 for the course ECO 1104 taught by Professor Crabbe during the Winter '08 term at University of Ottawa.

Page1 / 84

9-CostofProduction - 9. Cost of Production (Chapter 13)...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online