Ch 9 Production Output and Costs - Profit, Output, and...

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Profit, Output, and Costs Chapter 8 1
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Profit Comparisons Consumers seek to maximize utility subject to a budget constraint Producers seek to maximize profit by hiring the correct factors of production Result: Profit ( = ∏) = Revenue – Costs 2
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Profit Measures Profit ( = ∏) = Revenue – Costs Two types of profit: Economic Profit : the difference between revenue and the both implicit and explicit (non-sunk) economic costs Economic Profit = Revenue – Economic Cost Accounting Profit : the difference between revenue and explicit costs (firms “out-of- pocket” expenses) 3
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Profit Example–Restaurant Accounting Profit Revenue Sales $300,000 Costs Rent $ 40,000 utilities $ 5,000 wages $ 60,000 food $ 30,000 supplies $ 8,000 4 Economic Profit Revenue Sales $300,000 Costs Rent $ 40,000 utilities $ 5,000 wages $ 60,000 food $ 30,000 supplies $ 8,000 outside wage $250,000 (as a professional chef)
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Profit Example—Restaurant On paper this is a good idea…but, when accounting for other implicit costs it is not worth it. Economic Profit < 0 Revenue < Economic Profit Thus the value of the outside option is greater 5
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Production Timings Long run: time frame in which the quantities of all factors of production can be varied Firm must be aware of sunk costs (a cost incurred by the firm that cannot be reversed) which are irrelevant to a firm’s current decisions Short run: time frame in which the quantity of at
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This note was uploaded on 02/23/2012 for the course ECONOMICS 251 taught by Professor Kelly during the Summer '11 term at Purdue University-West Lafayette.

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Ch 9 Production Output and Costs - Profit, Output, and...

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