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Lecture 11

ECON 20A Lecture 11: Lecture 11

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William Branch

Lecture 11 I. Basic Definitions a. Total revenue amount a firm receives for sale of its output (price x quantity) b. Total cost market value of the inputs a firm uses in production c. Profit total revenue total cost II. Economic vs. Accounting cost a. Cost of something is what you give up to get it (opportunity cost) b. Firms costs include opportunity costs i. Explicit costs wages, costs of purchasing material inputs, etc. ii. Implicit costs foregone opportunities, other opportunity costs, such as what an owner of a business could be earning in another occupation c. Accounting costs only include explicit costs d. Economic cost include both explicit and implicit costs e. Cost of capital most important opportunity (implicit) cost i. Example: Tom uses 100,000 in savings to buy fishing boat. Otherwise would have earned 2 interest. So, 2000 opportunity cost 1. Important cost to include ii. Example: suppose Tom used 50,000 in savings and borrowed 50,000 in savings and borrowed 50,000 at 2 interest 1. Accounting cost would measure the 1000 in interest 2. Economic cost would include opportunity cost: 1000 in foregone interest by using 50,000 in savings 3. Economic cost the same in two examples III. Economic vs. Accounting Profit a. Accounting profit = total revenue total explicit cost b. Economic profit = total revenue total explicit cost total implicit cost c. In finance, observe accounting profit but need economic profit to properly value a company IV. Production functions and costs a. Production function relationship between quantity of inputs used to make a good and the quantity of output of that good i. Input output b. Close relationship between how much can produce with inputs and the total cost of producing output c. Example: Toms coconut water factory i. Has one factory and hires workers as input into bottling coconut water. Assume wage 10hour ii. Changes production by varying workers iii. In shortrun, cant build another factory iv. Toms Costs 1. Fixed cost: of operating a factory. This doesnt change with production level 2. Marginal product of labor (MPL) an increase in output that arises from an additional unit of input
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