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econ 211 lecture 11

# econ 211 lecture 11 - The Firm A firm is an institution...

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The Firm A firm 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. Its 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. Total 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

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econ 211 lecture 11 - The Firm A firm is an institution...

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