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ECON 101 2Midtermreview

The firm experiences diminishing marginal returns

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Unformatted text preview: eive on average is called normal profit. Normal profit is the cost of entrepreneurship and is a cost of production. In addition to supplying entrepreneurship, the owner might supply labour but not take as wage. The opportunity cost of the owner’s labour is the wage income forgone by not taking the best alternative job. Economic Accounting: A Summary Economic profit equals a firm’s total revenue minus its total opportunity cost of production. The example in Table 10.1 on the next slide summarizes the economic accounting. The Firm’s Decisions To maximize profit, a firm must make five basic decisions: 1. What to produce and in what quantities 2. How to produce 3. How to organize and compensate its managers and workers 4. How to market and price its products 5. What to produce itself and what to buy from other firms The Firm’s Constraints The firm’s profit is limited by three fea...
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