1. Profit, Costs, and Production BEHIND THE SUPPLY CURVE

2.  Profit  Profit = Total Revenue – Total Cost  Primary goal of a firm is to maximize profit  Can be done in two ways  Increase revenue  Reduce costs  What types of costs exist? BEHIND THE SUPPLY CURVE

3.  Types of Costs  Explicit Costs  Cost that requires an expenditure (example: tuition)  Fixed Costs – NOT dependent on level of production (often time related)  Variable Costs – Change with level of production (raw materials)  Implicit Costs  Opportunity costs (what have you given up?)  What are you thinking of giving up going to college? BEHIND THE SUPPLY CURVE

4. How you would spend the last hour of your life? THE ULTIMATE MARGINAL ANALYSIS (AND A TOUCH MACABRE):

5.  Profit Maximization  Profit = total revenue – total costs  New Question to Ask:  What quantity of output would maximize the producer’s profit?  When should a producer stop producing?  Use marginal analysis to answer the question  Marginal analysis is all about the NEXT good/dollar/hour BEHIND THE SUPPLY CURVE

7.  Principle of marginal analysis  Proceed until marginal benefit (gains from producing one more item) EQUALS marginal cost (cost of producing one more item)  If MC = MB, STOP  Finding marginal benefit leads to looking at marginal revenue  Marginal revenue – additional revenue generated from selling one more item BEHIND THE SUPPLY CURVE

8.  MR = ∆TR/∆Q  MR = marginal revenue  TR = total revenue  Q = quantity  But wait, we can graph this!  Marginal cost curve (MC)  Marginal revenue curve (MR) BEHIND THE SUPPLY CURVE

11.  When is production profitable?  Depends on ECONOMIC ACCOUNTING (taking into account opportunity cost)  Economic profit vs. Accounting profit  Normal profit = Economic profit of 0  Normal profit is when a firm could do NO better using their current inputs  Actually a good thing BEHIND THE SUPPLY CURVE

12.  If you are starting an organic farm in Hudson, what do you purchase/pay for to make your farm as cost-efficient as possible?  Details – you need fixed and variable costs QUICK DISCUSSION