ECO 120 Lecture 20: Chapter 13

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Key assumption about firm behavior: firm"s goal is to maximize profit. Profit = total revenue - total cost. Costs: explicit v. implicit: explicit cost - outlay of money. Ex: paying wages to workers: implicit cost - no cash outlay. Economic v. accounting profit: economic profit - total revenue minus total costs (including explicit and implicit costs, accounting profit - total revenue minus explicit costs. Ignores implicit costs, so higher than economic profit. Production function: shows the relationship between amount of inputs used to produce a good and output. Can be shown as a graph, table, etc. Fixed and variable costs: fixed costs (fc) - do not vary with the quantity of output produced. Ex: loans, rent: variable costs (vc) - vary with the quantity produced. Ex: material costs: total cost (tc) = fc+vc, total cost (tc) = fc+vc, average total cost (atc) - equals total cost divided by the quantity of output. At first falling afc pulls atc down.

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