ap economics: module 52 terms

primary goal for most firms

maximize profit

profit

total revenue - total cost

total revenue

price of output * quantity sold → P*Q

total cost

cost of all inputs used to make a certain amount of output

explicit cost

a cost that requires an outlay of money

implicit cost

doesn’t require an outlay of money; it is measured by the value, in dollar terms, or benefits that are forgone

• think of opportunity costs

t or f: implicit costs are negligible compared to explicit costs

f: implicit costs can be equal to or greater than explicit costs

depreciation

a reduction in value; the wearing down of capital

accounting profit

a business’s total revenue minus the explicit cost and depreciation

• reported on income tax forms, told to investors

economic profit

the business’s total revenue minus the o.c. of its resources (includes implicit and explicit costs)

• usually < accounting profit

• what most people refer to when they say profit

2 reasons a business can face implicit costs

1. the business owns its capital; they don’t pay for using it, but they pay an implicit cost b/c they don’t use the capital in another way

2. the owner puts time and energy into the business that could be used elsewhere (prominent in small businesses)

examples of capital

equipment, buildings, tools, inventory, financial assets

implicit cost of capital

the o.c. of the capital used by a business; the income the owner could have realized from that capital if it had been used in its next best alternative way

what the sign of economic profit tells us

positive: good, current use of resources is the best use, TR > I and E costs

negative: bad, there’s a better alternative use, and businesses must change their choices (otherwise they will shut down in the LR)

zero: normal profit, no better alternative

normal profit

when economic profit equals zero; not a bad thing, it is an economic profit just high enough to keep a firm engaged in its current activity

• firm can’t do better using its resources in an alternate activity

• “break-even”