1. Copyright©2004 South-Western Mods 52-56 The Costs of Production

2. Copyright © 2004 South-Western/ The Firm’s Objective The economic goal of the firm is to maximize profits!!!

3. Copyright © 2004 South-Western/ Total Revenue, Total Cost, and Profit Profit = Total revenue - Total cost P = TR - TC

4. Copyright © 2004 South-Western/ Costs Explicit and Implicit Costs Explicit costs are input costs that require a direct outlay of money by the firm. Implicit costs are input costs that do not require an outlay of money by the firm—they are opportunity costs of being in business, rather than doing something else.

5. Copyright © 2004 South-Western/ Accounting Profit Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. AP=TR-EC only So…if that is a positive number—accountants say you are making a profit.

6. Copyright © 2004 South-Western/ Economic Profit Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs. EP=TR-TC (EC + IC) When economic profit is equal to zero, or break-even, the firm is said to be earning a “normal profit” or “zero economic profit.”

7. Accountants versus Economists Copyright © 2004 South-Western Revenue Total opp costs How an Economist Views a Firm How an Accountant Views a Firm Revenue Economic profit Implicit costs Explicit costs Explicit costs Accounting profit

8. Copyright © 2004 South-Western/ THE VARIOUS MEASURES OF COST Costs of production may be divided into: fixed costs and variable costs.

9. Copyright © 2004 South-Western/ Fixed and Variable Costs Fixed costsFixed costs are those costs that DO NOT vary with the quantity of output produced. Variable costsVariable costs are those costs that DO Vary with the quantity of output produced. Practice problems