The Costs of Production luHInSNAI Chapter 13 Copyright C 2001 by Harcourt, Inc All rights reserved. Requests for permission to make copies of any part of t work should be mailed to Permissions Department, Harcourt College Publishers 6277 Sea Harbor Drive. Orlando Florida 32887-6777
The Costs of Production Chapter 13 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777
The costs of production The law of supply o Firms are willing to produce and sell a greater quantity of a good when the price of the good is high oThis results in a supply curve that slopes upward H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Costs of Production The Law of Supply: uFirms are willing to produce and sell a greater quantity of a good when the price of the good is high. uThis results in a supply curve that slopes upward
The Firms Objective The economic goal of the firm is to maximize profits. H arc Inc items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Firm’s Objective The economic goal of the firm is to maximize profits
A Firm's Total revenue and Total Cost ◆ Total revenue e The amount that the firm receives for the sale of its output ◆ Total cost o The amount that the firm pays to buy Inputs H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Firm’s Total Revenue and Total Cost uTotal Revenue u The amount that the firm receives for the sale of its output. uTotal Cost u The amount that the firm pays to buy inputs
A Firm's Profit Profit is the firms total revenue minus its total cost Profit= Total revenue- Total cost H arc Inc items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Firm’s Profit Profit is the firm’s total revenue minus its total cost. Profit = Total revenue - Total cost
Costs as Opportunity Costs A firm's cost of production includes all the opportunity costs of making its output of goods and services H arc Inc. items and derived items c ht o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Costs as Opportunity Costs A firm’s cost of production includes all the opportunity costs of making its output of goods and services
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. iMplicit costs do not involve a direct money outlay H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Explicit and Implicit Costs A firm’s cost of production include explicit costs and implicit costs. uExplicit costs involve a direct money outlay for factors of production. uImplicit costs do not involve a direct money outlay
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 firms total revenue minus only the firm's explicit costs. In other words, they ignore the implicit costs. H arc Inc. items and derived items c ht o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economic Profit versus Accounting Profit uEconomists measure a firm’s economic profit as total revenue minus all the opportunity costs (explicit and implicit). uAccountants 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
Economic Profit versus Accounting Profit When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. o Economic profit is smaller than accounting profit H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economic Profit versus Accounting Profit uWhen total revenue exceeds both explicit and implicit costs, the firm earns economic profit. u Economic profit is smaller than accounting profit
Economic Profit versus Accounting profit How an economist How an Accountant Views a Firm Views a firm Economic profit Accounting profit Implicit Revenue costs Revenue Total opportunity costs Explicit Explicit costs costs H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economic Profit versus Accounting Profit 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