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ECON 1B03 Lecture Notes - Production Function, W. M. Keck Observatory, Marginal Product

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Hannah Holmes

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Richard Damra Monday, February 25, 2013
Econ 1B03 - Chapter 13 Cost of Production
The economic goal of every firm is to maximize its profit
Total Revenue, RV
o The amount a firm receives for the sale of its output
Total Cost, TC
o The market value of the inputs a firm uses in production
Profit, II, is the firm’s total revenue minus its total cost.
Profit = Total Revenue Total Cost
o II = TR TC
A firm’s cost of production includes all opportunity costs of making its output of goods and
Explicit and Implicit Costs
o A firm’s cost of production include explicit costs and implicit costs.
o Explicit costs: Require a direct outlay of money (Can get a receipt).
o Implicit costs: Don’t require a direct outlay of money (Money you could have made if
you invested in ________ instead of upgrading the computer in your office).
Economists measure a firm’s economic profit as total revenue minus total cost, including both
explicit and implicit costs, i.e, total opportunity costs
Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s
explicit cost
When total revenue exceeds both explicit and implicit costs, the firm earns economic proft
Economic profit is smaller than accounting profit because it includes implicit costs.
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