Profit, Costs, and Production BEHIND THE SUPPLY CURVE
Profit Profit = Total Revenue – Total Cost Primary goal of a firm is to maximize profit Can be done in two ways Increase revenue Reduce costs What types of costs exist? BEHIND THE SUPPLY CURVE
Types of Costs Explicit Costs Cost that requires an expenditure (example: tuition) Fixed Costs – NOT dependent on level of production (often time related) Variable Costs – Change with level of production (raw materials) Implicit Costs Opportunity costs (what have you given up?) What are you thinking of giving up going to college? BEHIND THE SUPPLY CURVE
How you would spend the last hour of your life? THE ULTIMATE MARGINAL ANALYSIS (AND A TOUCH MACABRE):
Profit Maximization Profit = total revenue – total costs New Question to Ask: What quantity of output would maximize the producer’s profit? When should a producer stop producing? Use marginal analysis to answer the question Marginal analysis is all about the NEXT good/dollar/hour BEHIND THE SUPPLY CURVE
Principle of marginal analysis Proceed until marginal benefit (gains from producing one more item) EQUALS marginal cost (cost of producing one more item) If MC = MB, STOP Finding marginal benefit leads to looking at marginal revenue Marginal revenue – additional revenue generated from selling one more item BEHIND THE SUPPLY CURVE
MR = ∆TR/∆Q MR = marginal revenue TR = total revenue Q = quantity But wait, we can graph this! Marginal cost curve (MC) Marginal revenue curve (MR) BEHIND THE SUPPLY CURVE
When is production profitable? Depends on ECONOMIC ACCOUNTING (taking into account opportunity cost) Economic profit vs. Accounting profit Normal profit = Economic profit of 0 Normal profit is when a firm could do NO better using their current inputs Actually a good thing BEHIND THE SUPPLY CURVE
If you are starting an organic farm in Hudson, what do you purchase/pay for to make your farm as cost-efficient as possible? Details – you need fixed and variable costs QUICK DISCUSSION