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econpart5 Notes.docx

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York University
ECON 1000

Chapter 10Firm and its economic problemEach firm is an institution that hires factors of production and organizes those factors to produce and sell goods and servicesOur goal in this chapter is to predict firms behavior To do so we need to know a firms goal and the constraints it faces A firms goal is to maximize profit A firm that does not seek to maximize profit either fails or is taken over by a firm that does seek that goalAccounting profitAccountants measure a firms profit to ensure that the firm pays the correct amount of income tax and to show its investors how their funds are being used Depreciation is the fall in the value of a firms capital An accountant does not include the cost of a firm using its own capital or the cost of resources supplied by the firms owner An accountant includes any costs that require a payment by the firm Economic accountingEconomists measure a firms profit to enable them to predict the firms decisions and the goal of these decisions is to maximize economic profit Economic profit is equal to total revenuetotal cost with total cost measured as the opportunity cost of production The opportunity cost of production is the value of the best alternative use of the resources that a firm uses in productionA firms opportunity cost of production is the value of real alternatives forgone A firms opportunity cost of production is the sum of cost of using resourcesBought in the marketA firm incurs an opportunity cost when it buys resources in the market The amount spent on these resources is an opportunity cost of production because the firm could have bought different resources to produce some other goods and services Owned by the firm A firm incurs an opportunity cost when it uses its own capital The cost of using capital owned by the firm is an opportunity cost of production because the firm could sell the capital that it owns and rent capital from another firm When a firm
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