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ECON 1000 Quiz: Micro4th ppt notes ch13
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Department
Economics
Course
ECON 1000
Professor
Avi Cohen
Semester
Fall

Description
Total Revenue, Total Cost, Profit We assume that the firm’s goal is to maximize profit. Costs: Explicit vs. Implicit Explicit costs – require an outlay of money, e.g. paying wages to workers Implicit costs – do not require a cash outlay, e.g. the opportunity cost of the owner’s time Remember one of the Ten Principles: The cost of something is what you give up to get it. This is true whether the costs are implicit or explicit. Both matter for firms’ decisions. Explicit vs. Implicit Costs: An Example You need $100,000 to start your business. The interest rate is 5%. Case 1: borrow $100,000 explicit cost = $5000 interest on loan Case 2: use $40,000 of your savings, borrow the other $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000. Economic Profit vs. Accounting Profit Accounting profit = total revenue minus total explicit costs Economic profit = total revenue minus total costs (including explicit and implicit costs) Accounting profit ignores implicit costs, so it’s higher than economic profit. Note: most accountants know this and take it into account Economic profit vs. accounting profit The equilibrium rent on office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if a. you rent your office space b. you own your office space The Production Function A production function shows the relationship between the quantity of inputs used to produce a good, and the quantity of output of that good. It can be represented by a table, equation, or graph. Farmer Jack grows wheat. He has 5 acres of land. He can hire as many workers as he wants. Marginal Product The marginal product of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant. E.g., if Farmer Jack hires one more worker, his output rises by the marginal product of labour. Notation: ∆ (delta) = “change in…” Examples: ∆Q = change in output, ∆L = change in labour Marginal product of labour (MPL) = Why MPL Is Important Recall one of the Ten Principles: Rational people think at the margin. When Farmer Jack hires an extra worker, his costs rise by the wage he pays the worker his output rises by MPL Comparing them helps Jack decide whether he would benefit from hiring the worker. Why MPL Diminishes Diminishing marginal product: the marginal product of an input declines as the quantity of the input increases (other things equal) E.g., Farmer Jack’s output rises by a smaller and smaller amount for each additional worker. Why? If Jack increases workers but not land, the average worker has less land to work with, so will be less productive. In general, MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc.). Farmer Jack must pay $1000 per month for the land, regardless of how much wheat he grows. The market wage for a farm worker is $2000 per month. So Farmer Jack’s costs are related to how much wheat he produces…. Marginal Cost Marginal Cost (MC) is the increase in Total Cost from producing one more unit: Why MC Is Important Farmer Jack is rational and wants to maximize his profit. To increase profit, should he produce more whea
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