is an institution that hires factors of production and organizes those factors to
produce and sell goods and/or services
Firm’s goal: maximize profit
Profit = total revenue – total costs
Where total costs includes implicit costs (i.e., opportunity costs).
For example, the cost
of using its own capital is an implicit cost (opp. Cost) because the firm could be renting
that capital out to others.
Sidney’s story: Sidney runs a sweater business.
Revenue is 400,000 per year.
expenses are 80,000 for wool, 20,000 for utilities, 120,000 for wages, and 10,000 on
interest from a bank loan.
Explicit expenses = 230,000.
Implicit costs: Sidney’s wages foregone (he could have another job) is 40,000, Sidney’s
interest foregone (see below for this) is 20,000, economic depreciation on capital is
25,000, and normal profit is 50,000.
Total implicit costs are therefore 135,000.
cost is explicit plus implicit=
230,000 + 135,000 = 365,000.
Economic profit = 400,000 – 365,000 = 35,000
Normal profit vs. economic profit: normal profit is the return an entrepreneur can expect
to receive on average (in a certain business).
If normal profit in the textile business is
$50,000 a year, this amount must be added to Sidney’s costs to determine his opportunity