Who wants to be an accountant?

What is the Goal of Business Firms?  The goal of every company is to MAXIMIZE PROFITS

What do we need to know to determine if there is a profit?  We need to know about Costs What are the payments associated with making this product?  We need to know about Revenues What is the income, earnings, or proceeds that come from this business?

Various Measures of Cost  Fixed Cost (FC): costs that do not vary with the quantity of output produced Fixed costs stay the same even if production is 0 ○ Lease costs are the same no matter how much you produce ○ Insurance costs are the same not matter how much you produce

Various Measures of Cost Cont.  Variable Cost (VC): costs that do vary with the quantity of output Variable costs increase as you make more product ○ Labor costs increase as output increases ○ Raw material costs increase as output increases

Measures of Cost cont.  Marginal cost (MC) is the cost of producing one more unit of a good  Marginal revenue (MR) is the revenue from selling an additional unit of a good

Measures of Cost Cont.  Total Cost (TC) is the sum of its fixed and variable costs TC = FC + VC

Measures of Cost cont.  Average total cost (ATC) tells the average per-unit cost ATC = TC Q

Marginal Cost  Marginal cost is the cost of producing an additional unit of a good Marginal = + 1 MC = TC Q Remember: means “change in” or the difference

Various Measures of Revenue  Total revenue (TR) is the amount of money a company receives from the sale of its goods or services Simply multiply the price of the good (P) by the quantity of output (Q) TR= P x Q

Measures of Revenue cont.  Marginal revenue (MR) is the money received from selling an additional unit of a good MR = TR Q

Profit and Loss  Profit is the amount of money left over after all the costs of production have been paid  (Loss) is the amount of money by which total cost (TC) exceeds total revenue (TR)  Profit or (loss) = TR-TC

How to compute profit and loss  Profit or loss = TR-TC TR = P x Q TC = FC + VC  Example: VC is $100, FC is $400. What is TC? ○ $100 + $400 = $ units are sold for $7. What is TR? ○ $7 x 100 = $700 What is our profit or loss? ○ $700 - $500 = $200 profit

$20 $28 $32 $26 $104 ($20) $20 $43

How much of a good should a firm produce? Stop when the amount it cost you to make the good exceeds the amount of revenue you receive from the good

How many t-shirts should I produce?  You want to keep producing t-shirts until Marginal revenue = Marginal cost  If MC > MR do not produce T-shirts MR = ∆ TR ∆ Q MC= ∆ TC ∆ Q 1$10$8 2$10$9 3$10 4 $12 5$10$16

How Many Workers Should the Firm Hire? Stop when the amount you pay the worker exceeds the value of their output

Law of Diminishing Marginal Returns Definition: a level of production in which the marginal product of labor decreases as the number of workers increases EOC STUDY GUIDE: Microeconomics #15

Law of Diminishing Marginal Returns  Diminishing returns occurs when an increase in labor does not lead to an increase in productivity

Where Does the Law of Diminishing Marginal Returns Set in? WorkersQuantity of output produced each day Additional output produced as a result of hiring an additional worker 00 units

Hiring Employees  What does diminishing marginal returns have to do with hiring?

Hiring Employees  Say each unit of output sells for $30  And each worker is paid $90 a day  How many workers do we want to hire? WorkersTotal productionMarginal production 00 units