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Lecture 7

ECON 1B03 Lecture Notes - Lecture 7: Marginal Product, Profit (Economics), Fixed Cost


Department
Economics
Course Code
ECON 1B03
Professor
Hannah Holmes
Lecture
7

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Topic 7: Production and Costs
Profit
Profit ()
Profit = Total Revenue Total Costs
o Firms want to maximize profit
Total Revenue (TR)
Amount a firm receives for the sale of its output
Total Cost (TC)
The market value of the inputs a firms uses in production
Cost of Production
A firm’s opportunity costs of making its output of goods
o Explicit Costs Requires a direct outlay of money and you can get a receipt
o Implicit Costs No outlay of money and no receipt available
Types of Profit
Economic Profit
Used by economists
o Total Revenue Total Costs
Economic Costs
o Includes both Explicit and
Implicit Costs
Accounting Profit
Used by accountants
o Total Revenue Total Costs
o Only includes Explicit Costs
Accounting Profit is larger than
Economic Profit
o Because Economic Costs are
bigger than Explicit Costs

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Categories of Economic Profit
Positive Economic Profits
Very high unexpected profits for firms in an industry
o Attracts new entrepreneurs to the industry
o Induces new firms to enter the market
Economic Losses
Negative profits
o Firms that consistently earn losses will eventually leave the industry
Normal Economic Profits
Zero Economic Profits
o Profits you expect for firms in an industry
o No new firms want to enter, no existing firms want to exit
o The firm is still making Accounting Profit

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The Production Function
Production Function
Relationship between quantity of inputs used and quantity of outputs obtained
o Assume firms use most efficient technology available
Marginal Product
The change in output that arises from an
additional unit of input
o The slope of the Product Function
Diminishing Marginal Product
Decrease in Marginal Product as quantity
of inputs used increases
Average Product
The quantity of output per input
o Also diminishes at a certain point
Reasons for Diminishing Marginal Product
Too many workers get in each other’s way
o Slows things down instead of speed things up
Not enough work for everyone at the same time
o All the machines are being used
Anything that makes workers less productive than if there was less of them
Example Jerry’s TV Inc.
As labour increases, output increases
o Each additional worker past the
20th adds less to the total output
o Compared to the previous group
o The 6th group of workers takes
away from the total output
Diminishing Marginal Product occurs past
the 20th worker
o 10 workers 5 TVs
o + 10 workers 7 TVs
Diminishing Average Product occurs past
the 20th worker
o 10 workers 5 TVs
o 20 workers 6 TVs
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