ECON208: The objective of firms

what are transaction costs?

cost of coordinating and motivating people to carry out transactions

what are firms trying to achieve

max profits, profits = total revenue - total costs

why is market share related to profits ?

1. economies of scale - lower average cost per unit produced

2. market power - more bargaining power buying inputs

3. good management - increasing market share requires good management

accounting profit =

revenue - explicit costs

economic profits =

revenue - explicit costs - implicit costs

economic costs =

costs relevant for decision making, includes both explicit and implicit

opportunity costs =

cost of foregone opportunities or alternatives if resources are used for something.

explicit costs =

monetary cost

implicit costs =

non-monetary costs