1. Economics Class Notes October 12 and 13

2. 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

3. Class Notes
Lesson Two: Costs, Revenues, and Profits

4. 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.****

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

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

7. 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.

8. 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.

9. 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.)

10. Revenue
All money earned by a firm

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

12. 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.

13. 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.

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

15. 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.