Producer Choice How Firms Behave. What are Profits?

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Presentation transcript:

Producer Choice How Firms Behave

What are Profits?

Profit$$

Types of Profit Economic Includes opportunity Costs Accounting $$$$ and cents

Types of Profit Accounting TR= P*Q Accounting Profit + TR- TC Explicit Costs Only! Economic Is it worth being an entrepreneur? Opportunity Costs= Implicit Costs Economic Profit= TR- TC (including Implicit Costs) Normal Economic Profits= 0

Types of Profit Accounting TR- Explicit Costs Economic TR- Opportunity Costs OC= IC + EC Opp ortu nity (eco nomi c) Cost

What is Normal Profit? When Economic Profit =

0

How many people should a firm hire? Total Physical Product (TPP) Average Physical Product (APP) total product/ units of labor Marginal Physical Product (MPP) change in total product/ change in labor input

Production Graphs Law of Diminishing Returns

Diminishing Returns

Explicit Costs Costs that business managers pay out of pocket because they must be paid. Some Explicit Costs Include: 1.wages 2.taxes 3.rent 4. machinery

Implicit (opportunity) Costs Does not require an outlay of money. Its worth is based on value

TC= FC +VC Total Costs Fixed Costs: those that do not vary with change in output (independent) Variable Costs: those that change with the level of output (dependent)

Eventually

Sunk Costs Can’t do anything about it “What’s done is done” “Give me your wand”

Average Costs AFC= TFC/Q AVC= TVC/Q ATC= AFC + AVC

Marginal Costs MC= additional (extra) costs of production, (1 more unit of output) MC= change in TC/ change in Q

Relationship Between Production Curves and Cost Curves ProductCosts

Total Cost Graphs

Table Talk

Long Run and Short Run Short Run has some fixed costs Is it time to cut costs or build a new plant? Returns to Scale All costs are variable Economies of Scale Diseconomies of Scale

Long Run Decisions Economies of Scale: long-run ATC is downward sloping Constant Returns to Scale: long- run ATC is horizontal Diseconomies of Scale: long run ATC is upward sloping

Is it time to expand or cut back? Short Run At least one fixed cost Usually land or capital Long Run All costs are variable No exact time frame

Long- Run Graphs All costs are variable When is it time to expand your firm?

Ready or Not!

Why do business people study these graphs?