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

2. 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.

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

4. 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?

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

6. 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

7. Diminishing Returns

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

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

10. Figure 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

11. 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