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

Copyright©2004 South-Western

Mods Mods 52-5652-56

The Costs of Production

Copyright © 2004 South-Western/

The Firm’s Objective

The economic goal of the firm is to maximize profits!!!


Total Revenue, Total Cost, and Profit

Profit = Total revenue - Total costProfit = Total revenue - Total cost

P = TR - TCP = TR - TC


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.


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.


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.”

Accountants versus Economists

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Revenue

Totaloppcosts

How an EconomistViews a Firm

How an AccountantViews a Firm

Revenue

Economicprofit

Implicitcosts

Explicitcosts

Explicitcosts

Accountingprofit


THE VARIOUS MEASURES OF COST

• Costs of production may be divided into:

fixed costs and variable costs.


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

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

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