ECO100Y1 Lecture Notes - Lecture 7: Diminishing Returns, Opportunity Cost, Fixed Cost
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Total revenue - opportunity costs (explicit plus implicit) costs: requires that implicit cost be identified and measured, purpose is to determine whether firm should leave industry (or whether other firms have incentive to enter industry) Wages paid to employees, cost of raw materials, etc. Opportunity cost of owner"s invested capital (normal rate of profit) + time. Because economic profit is negative fir(cid:373) should e(cid:454)it i(cid:374) lo(cid:374)g ru(cid:374) *if 5%, gain of ,000, so stay in business. Because accounting profit is positive does (cid:374)ot provide sig(cid:374)al regardi(cid:374)g e(cid:374)tr(cid:455)/e(cid:454)it. Should i stay in business: accountant responds. You earned ,000 on your investment of ,000 or 7. 5% If you can earn more than 7. 5% elsewhere, you should get out of the business (economist: if opportunity cost of your invested funds is more than 7. 5%, economic profit is negative and should leave the business) A firm produces its output with one variable factor and one fixed factor.