ECON 1B03 Lecture Notes - Lecture 1: Production Function
24 Jun 2018
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Chapter 7
The Production Function
Profit
-Profit, Ļ, is the firmās Total Revenue ā Total Cost
- Firms want to maximize profit
- Profit = Total Revenue ā Total Cost
Total Revenue, TR
- The amount a firm receives for the sale of its output
Total Cost, TC
- The market value of the inputs a firmās uses in production (of outputs)
Cost of production
-A firmās economic Cost of Production includes all the opportunity costs of making its output of
goods and services
-Recall: Explicit and implicit costs
oA firmās cost of production includes explicit costs and implicit costs
oExplicit costs: require a direct outlay of money (get a receipt for them)
oImplicit costs: no outlay of money and no receipt
-Economists measure a firmās economic profit as total revenue ā total cost, including both
explicit and implicit costs (total opportunity costs)
-Accountants measure the accounting profit as the firmās total revenue ā explicit costs
-When total revenue exceeds both explicit and implicit costs, the firm earns economic profit
-Economic profit is smaller than accounting profit because economic costs are bigger than the
explicit costs considered by an accountant
Three Categories of Economic Profit
-Positive economic profits: super high, unexpected profits for firms in that industry
oThese are profits that attract entrepreneurs to the industry and induce new firms to
enter the market
-Economic Losses: are negotiable profits
oFirms that consistently earn losses will eventually leave the industry
-Normal Economic Profits: zero economic profits
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ECON 1B03 Full Course Notes
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Document Summary
Profit, , is the firm"s total revenue total cost. The amount a firm receives for the sale of its output. The market value of the inputs a firm"s uses in production (of outputs) A firm"s economic cost of production includes all the opportunity costs of making its output of goods and services. Recall: explicit and implicit costs: a firm"s cost of production includes explicit costs and implicit costs, explicit costs: require a direct outlay of money (get a receipt for them, implicit costs: no outlay of money and no receipt. Economists measure a firm"s economic profit as total revenue total cost, including both explicit and implicit costs (total opportunity costs) Accountants measure the accounting profit as the firm"s total revenue explicit costs. When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than accounting profit because economic costs are bigger than the explicit costs considered by an accountant.
