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Econ 1B03 - Chapter 13 Part 1.docx

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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 services.  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.  Richard Damra Monday, February 25, 2013 The Production Function  Production Function: Shows the relationship between quantity of inputs used to make a good and the quantity of output of that good. Jerry’s TV Inc.  Jerry’s TV assembles plasma televisions.  There is only one input to production – labour.  Jerry’s production function is given below.
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