Chapter 11: Costs and Profit maximization under competition

How do firms sets their price in a competitive market

Equal to the market price

Explicit costs

Money that comes out of pocket

EX: Salary paid to a worker

Implicit costs

Money does that does not come out of pocket

EX: The loss of income from an old job if you start your own business

Fixed costs

Costs that do not change with the level of output produced, such as rent or salaries.

EX: Rent

Variable costs

Costs that change with the level of output produced, such as materials and labor.

EX: Commission

Formula for profit

Total revenue - Total cost

Formula for total revenue

Price per unit × Quantity sold

Formula for total cost

Fixed costs + Variable costs

Formula for Marginal revenue

Change in total revenue divided by change in quantity

Formula for Marginal cost

Change in total cost divided by change in quantity

What does price equal

Marginal cost

P=MC