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Chapter 13

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CAS EC 101
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Chapter 13: The Costs of Production - What are Costs o Total revenue, total cost, and profit  Goal of a firm is to maximize profit  Firm’s profit is the amount that it receives for the sale of its output  total revenue  The amount a firm pays for inputs is total cost  Profit is a firm’s total revenue – total cost  To see how a firm maximizes profit, we must consider fully how to measure its total revenue and its total costs • Total revenue = the quantity of output the firm produces * the price at which it sells its output o Costs as Opportunity costs  Economists speak of firm’s cost of production, they include all opportunity costs  Explicit costs: input costs that require an outlay of money by the firm  Implicit costs: input costs that do not require an outlay of money by the firm  Total cost of a business is implicit + explicit costs o The cost of capital as an opportunity cost  Important implicit cost of almost any business is opp. cost of financial capital that has been invested in business o Economic profit vs. accounting profit  Economist measures a firm’s economic profit as a firm’s total revenue – all opp. costs of producing the goods and services sold  An accountant measures the firm’s accounting profit as the firm’s total revenue – the firm’s implicit costs  For business to be profitable from economist’s standpoint, the revenue must cover all opp. costs - Production and costs o The produc
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