The Cost of production Chapter 13
The Cost of Production Chapter 13
The Law of Supply Firms are willing to produce and sell a greater quantity of a good when the price of the good is higher This results in a supply curve that slopes upward
The Law of Supply • Firms are willing to produce and sell a greater quantity of a good when the price of the good is higher. • This results in a supply curve that slopes upward
The Firm's Objective o Economists normally assume that the economic goal of the firm is to maximize profits ofit
The Firm’s Objective • Economists normally assume that the economic goal of the firm is to maximize profits
A Firm's profit ● Total revenue The amount that the firm receives for the sale of its output Total cost The amount that the firm pays to buy inputs Profit is a firm' s total revenue minus its total cost Profit= Total revenue- Total Cost
A Firm’s Profit • Total Revenue – The amount that the firm receives for the sale of its output. • Total Cost – The amount that the firm pays to buy inputs. • Profit is a firm’s total revenue minus its total cost. Profit = Total Revenue – Total Cost
Cost as Opportunity cost o A firms cost of production includes all the opportunity costs of making its output of goods and services An important example is the opportunity cost of the financial capital that has been in vested in the business
Cost as Opportunity cost • A firm’s cost of production includes all the opportunity costs of making its output of goods and services. • An important example is the opportunity cost of the financial capital that has been invested in the business
Explicit and Implicit Costs A firms cost of production include explicit costs and implicit costs Explicit costs involve a direct money outlay for factors of production o Implicit costs do not involve a direct money outlay
Explicit and Implicit Costs • A firm’s cost of production include explicit costs and implicit costs. • Explicit costs involve a direct money outlay for factors of production. • Implicit costs do not involve a direct money outlay
Economic profit versus Accounting Profit e Economists measure a firms economic profit as total revenue minus all the opportunity costs (explicit and implicit o Accountants measure the accounting profit as the firm's total revenue minus only the firms explicit costs. In other words, they ignore the implicit costs When total revenue exceeds both explicit and implicit costs, the firm earns economic profit Economic profit is smaller than accounting profit
Economic Profit Versus Accounting Profit • Economists measure a firm’s economic profit as total revenue minus all the opportunity costs (explicit and implicit). • Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. In other words, they ignore the implicit costs. • When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. • Economic profit is smaller than accounting profit
Economic profit versus Accounting profit How an economist How an Accountant Views a firm Views a firm E conomic profit Accounting p fit Implicit Revenue costs Revenue Total opportunity costs Explicit Explicit costs costs
Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue Economic Profit Versus Accounting Profit
Example: EVA as Capital Cost Traditionally a firm's performance measure is centered by accounting profit, just considering the interest payment for debts by ignoring the opportunity cost of equity capital Economic value Added(eva)includes the opportunity cost of equity capital o eVa= net profit after tax -cost of equity capital
Example: EVA as Capital Cost • Traditionally a firm’s performance measure is centered by accounting profit, just considering the interest payment for debts by ignoring the opportunity cost of equity capital. • Economic Value Added (EVA) includes the opportunity cost of equity capital . • EVA= net profit after tax –cost of equity capital
Example: Data 从会计报表上看,2002年1214家中国上市 公司平均会计净利润为6428万元。 用EVA衡量方法来看,202年中国上市公 司的平均EVA为-1564万元。只有1/3的上市 司EVA为正数。 (资料来源:“谁创造财富,谁毁灭财富-2002年中国上市公司价值 创造和毁灭排行榜”,《财经(杂志)》,2003年11月05日,83-94 页。)
Example: Data • 从会计报表上看，2002年1214家中国上市 公司平均会计净利润为6428万元。 • 用EVA衡量方法来看，2002年中国上市公 司的平均EVA为-1564万元。只有1/3的上市 公司EVA为正数。 • （资料来源：“谁创造财富，谁毁灭财富－2002年中国上市公司价值 创造和毁灭排行榜”，《财经（杂志）》，2003年11月05日，83－94 页。）