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Chapter Some of Ch.10 - 15 .docx

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ECON 101
Emanuel Carvalho

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Account Vs. Economic Profits Firm – institution that has a goal to maximize profit Limits to profit maximization  Technology constrains – available resources & technology  Information constrains – limited information about past, present and future about firms production  Market Constraints – limited demand for firm’s output Explicit Costs – direct cost of purchasing resources Accounting Accounting cost = explicit cost + conventional depreciation Accounting profit = revenues – (explicit cost +conventional depreciation) Accounting Profit= Total Revenue (TR) – Explicit Cost Economic Opportunity costs = explicit cost + implicit costs Economic Profit = revenues - (explicit + implicit costs) Major implicit costs:  Implicit rent rate o Economic Depreciation (Change in the market value of capital) + forgone interest o Wage income forgone + normal profit ** Normal profit is part of implicit costs, economic profit (when positive) is over and above normal profit ** Economic profit of 0 is the same as a normal accounting profit (TR = Explicit + Implicit Costs) Economic Profit = Total Revenue (TR) – (Implicit + Explicit Costs) Fixed, Variable, and Marginal Cost Decision Time Frames  Short Run o Quantities of some resources are fixed; quantities of other are variable  Long Run o Quantities of all resources are variable Short-Run Cost  Total Cost (TC) = TFC + TVC o Total Fixed Cost (TFC) – cost of fixed inputs (including normal profits) o Total Variable Cost (TVC) – cost of variable inputs  Average Total Cost (ATC) = AFC + AVC o Average Fixed Cost (AFC) – total fixed cost per unit of input o Average Variable Cost (AVC) – total variable cost per unit of output  Marginal Cost (MC) - ∆TC resulting from a one-unit increase in output Marginal Revenue and Marginal Cost Don’t want MC > MR Profit maximization happens when MR = MC **In the short run it makes sense to produce at MR=MC even when MR is below ATC Long Term Supply Curve and Economic Profit Below Normal Profits  More people leave the industry  Supply goes down – Price goes up  Economic profit goes back to zero Above Normal Profits  More people enter the industry  Supply goes up – Price goes down  Economic profit goes back to zero ** In the short term you look where the MR=MC ** In the long run you are concerned where economic profit = 0 Perfect Competition Assumptions  Many firms  Identical products  No barriers to entry  No advantage for existing firms  Complete information In perfect competition  Each firm is a price taker o A firm that can alter its rate of production and sales without significantly affecting the market price of its production  Ex. If you sell water, which is supplied by millions of other places, including the sky. If you decided to set the price of a gallon of your water to $10, you will likely sell nothing because th
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