Defining Profit Lesson 8 Sections 52, 53, 54, 55.

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Presentation transcript:

Defining Profit Lesson 8 Sections 52, 53, 54, 55

Understanding Profit (52) Profit = Total Revenue – Total Costs Explicit vs Implicit Costs Explicit costs require payment of money Implicit Costs are benefits or value lost Opportunity Costs Accounting Profit vs Economic Profit Accounting Profit = Total Revenue – (Explicit Costs + Depreciation) Economic Profit = Total Revenue – (Explicit + Implicit Costs) When Economic Profit is positive, use of resources if optimal, and there is no better use for those resources When Economic Profit is negative, there is a better use of resources Normal Profit When economic profit = 0, use of resources cannot be better used, even though profit is not positive In other words, the opportunity costs (implicit costs) are equal to the economic profit.

Table 52.1 Opportunity Cost of an Additional Year of School Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Profit Maximization (53) Maximizing Profit Using Marginal Analysis to Choose Profit-Maximizing Quantity of Output Principle of Marginal Analysis Proceed until marginal benefit (revenue) equals marginal cost Marginal Revenue MR= Change in total revenue by one additional unit of output Marginal Cost Maximum Profit (Optimal Output Rule) When Marginal Revenue = Marginal Costs Marginal Cost Curve Marginal Revenue Curve When is Production Profitable?

Figure 53.1 The Firm’s Profit-Maximizing Quantity of Output Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

The Production Function (54) The Production Function is the relationship between inputs to a business and outputs. Inputs and Outputs Fixed Inputs Variable Inputs Long Run Short Run Total Product Curve Marginal Product of Labor Diminishing Returns Increasing Returns

Diminishing Returns

Firm Costs (55) From the Production Function to Cost Curves Fixed Costs Variable Costs Total Cost

Marginal Cost Marginal Cost Cost of making the next item MC=Change in Total Cost/Change in Quantity of Output

Figure 55.2 Total Cost and Marginal Cost Curves for Selena’s Gourmet Salsas Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Average Cost Average Cost Average Fixed Cost (AFC) Average Variable Cost (AVC) Average Total Cost (ATC) Minimum Average Total Cost (M) Marginal Cost (MC) and ATC