Economics Class Notes October 12 and 13

Basic Definitions Liability: the state of being responsible for something by law Example: 2. Limited Liability: Limited liability is a type of liability that the person’s responsibility does not exceed the amount they invested in a partnership or corporation

Class Notes Lesson Two: Costs, Revenues, and Profits

Firms Have to Answer Questions How much should we produce? What price should we charge? ****Firms use information about their costs and revenues to determine profit.****

Costs The money spent for resources used in production Resources= land (R), land (NR) labor, capital, entrepreneurship

Exhibit 7-5 from the Student Text Here are five costs concepts: fixed cost, variable cost, total cost, average total cost, and marginal cost.

Fixed and Variable Costs Fixed and variable costs are associated with the production of goods. A fixed cost is a cost, or expense, that is the same no matter how many units of a good are produced. An example is the rent paid for a building. A variable cost changes with the number of units of a good produced. Total cost is the sum of fixed cost plus variable cost: Total cost = Fixed cost + Variable cost.

Average Total Cost To determine how much you need to charge in order to make a profit, it helps to understand the concept of average total cost. The average total cost is the total cost divided by the quantity of output: Average total cost = Total cost ÷ Quantity.

Marginal Cost: An Important Cost Concept One concept is very important when deciding how much of a good to make—marginal cost. Marginal cost is the cost of producing an additional unit of a good—that is, the change in total cost that results from producing an additional unit of output. A perfect example of marginal cost involves airline travel. (See the following slide.)

Revenue All money earned by a firm

Total Revenue Total Revenue=price x quantity sold TR=P x Q

Total Revenue and Marginal Revenue Marginal revenue (MR) is defined as the revenue from selling an additional unit of a good—that is, the change in total revenue that results from selling an additional unit of output.

How Much Will a Firm Produce? A firm should continue to produce as long as marginal revenue is greater than marginal cost. In fact, economists state that if a firm seeks to maximize profits or minimize losses, it should produce the quantity of output at which MR = MC.

What Every Firm Wants: To Maximize Profit Maximizing profit is the same as getting the largest possible difference between total revenue and total cost.

How to Compute Profit and Loss When a firm computes its profit or loss, it first determines the total cost and total revenue and then finds the difference. Profit (or loss) = Total revenue - Total cost.