1. Firm Organization that plans production

2. Business Firm A firm where the profits of production are claimed by someone

3. 3 types of Business Firms 1. Sole Proprietorship – One owner, keeps all profit, unlimited liability 2. Partnerships – Two or more owners, unlimited liability 3. Corporation – Legal entity, shareholders get profit in dividends, limited liability

4. Costs Accounting Costs … the money you spend to produce a good or service Economic Costs … the opportunity cost or the value of the choice given up

5. Profit 1. Accounting Profit … the difference between accounting costs and Total Revenue 2. Economic Profit … the return to the firm in excess of both accounting and economic costs

6. Accounting Costs Total Cost = TC = the sum of all costs Total Fixed Cost = TFC = does not vary in the short run, no matter how many units are produced Total Variable Cost = TVC = changes with changes in the quantity produced

7. Average Costs Average Fixed Cost AFC=TFC/Q Average Variable Cost AVC=TVC/Q Average Total Cost AC=TC/Q

8. Marginal Cost Marginal cost is the change in total cost from producing one extra unit MC= ΔTC / ΔQ

9. Revenue Total Revenue is the money earned from the sale of goods or services TR=PxQ Marginal Revenue is the money earned from the sale of one extra unit of a good or service MR= ΔTR / ΔQ

10. Profit Accounting Profit is the money left over after all costs have been met. Profit = TR-TC Also known as normal profit Economic Profit is the money left over after all the accounting and economic costs have been met. Also known as excess profit

11. An Example Refer to handout

12. Cost Info

13. Add TFC and TVC to get TC

14. Compute AFC, AVC, AC,MC

15. Total Revenue

16. Compute MR

17. Compute Profit