Profits and costs

TR=P x Q Total revenue= price x quantity sold Profit= TR-cost Two types of costs: explicit costs-cost that requires an outlay of money (________________) implicit costs-cost that is measured by the value of foregone benefits (_________________________)

Cost of an additional year of college: Explicit costImplicit cost Tuition$17,000Forgone salary$35,000 Books/ supplies1,000 Computer1,500 Total explicit cost$19,500Total implicit cost$35,000 Total opportunity cost = Total explicit cost + Total implicit cost = $54,500

types of profit: 1.accounting profit- business’s total revenue minus the explicit cost and depreciation 2. economic profit-a business’s total revenue minus the opportunity cost of its resources. It is usually less than accounting profit.

Profit at a restaurant Total revenue$100,000 Explicit cost-60,000 Depreciation-5,000 Accounting Profit$35,000 Implicit cost of business Income owner could have earned on capital used in the next best way -3,000 Income owner could have earned as a chef in another restaurant -34,000 Economic profit$-2000 When owner earns a negative economic profit (aka a loss), means he would be better off financially if he devoted his time to next best alternative.

Normal profit-when economic profit is equal to __________. Profit just high enough to keep a firm engaged in its current activity.

Practice You sell T-shirts at your school’s football games. Each shirt costs $5 to make and sells for $10. Each game lasts two hours and you sell 100 shirts per game. You could always be earning $8 per hour at your other job. What is the accounting profit and what is the economic profit?

taking quantity into account ATC- average total cost-cost of a typical unit of a good. AR-average revenue-revenue received from a typical unit sold.

“thinking at the margin” thinking at the margin-rational decision makers make decisions based upon small incremental adjustments to behavior.

Principle of marginal analysis-every activity should continue until marginal benefit = marginal cost. Profit for a tomato farm when market price is $18 Q. of tomatoes (bushels) TRTCProfit TR-TC 0$0$14-$

Maximizing profit through marginal analysis Marginal revenue- the change in total revenue generated by an additional unit of output. MR= change in total revenue change in quantity of output Marginal cost-the cost of producing one more unit of output. MC= change in total cost change in quantity MC= ΔTC/ ΔQ MR= ΔTR/ ΔQ

Units of Output Total Cost (Dollars) Marginal Cost (Dollars) Units of outputTotal Revenue (dollars) Marginal revenue (dollars)

Optimal output rule -profit is maximized by producing the quantity at which the marginal revenue of the last unit produced is equal to its cost. MR=MC Short-run costs (market price is $18) Q. of tomatoes (bushels) TC Marginal cost of bushel MC= ΔTC / ΔQ Marginal revenue of bushel MR Net gain of bushel (MR-MC) 0$14 $16$18$

Practice Suppose a firm can sell as many units of output as it wants for a price of $15 per unit and faces total costs as indicated in the table below. Use the optimal output rule to determine the profit-maximizing level of output for this firm. QTC 0$

Production function-the relationship between quantity of inputs used to make a good and the quantity of output of that good. Law of diminishing marginal returns-as additional variable inputs are added to fixed inputs, the additional output will eventually ___________________.

cost curves compared Whenever marginal cost is__________than average total cost, average total cost is falling. Whenever MC is ___________than ATC, then ATC is rising.

breaking down all the cost curves _____________________-those costs whose total does not vary with short-run output ______________________-those costs that change with the level of output. Total cost-