3.2: Profit (copy)

Revenue And Profit

• Total Revenue = Price X Quantity

• Profit = Total Revenue - Total Cost

Accountants Vs. Economists

• Accountants Only Look At Explicit Costs

  • explicit Cost (out-of-pocket Cost): The Payment Paid By A Firm For Using The Resources Of Others

    • Eg. Rent, Wages, Materials, Electricity Bills

  • Accounting Profit = Total Revenue - Accounting Costs (explicit Only)

• Economists Examine Both Explicit Costs And Implicit Costs

  • implicit Cost: The Opportunity Cost That A Firm “pays” For Using Their Own Resources

    • Eg. Forgone Wage, Forgone Rent, Time

  • Economic Profit = Total Revenue - Economic Costs (explicit And Implicit)

Short-run Profit Maximization

• The Goal Of Every Business Is To Maximize Profit

• To Reach Maximum Profit, Firms Must Make The Right Output

• Firms Should Continue To Produce Until The Additional Revenue From Each New Output Equals The Additional Cost

Profit Maximizing Rule

• Marginal Revenue (MR) = Marginal Cost (MC)

Decisions To Enter/exit Markets

• Produce Or Shut Down?

• Shut Down Rule: A Firm Should Continue To Produce As Long As The Price Is Above The AVC; When The Firm Falls Below The AVC, It Should Minimize Its Losses By Shutting Down

  • Based In The Fact That If The Price Is Below The AVC, The Firm Has A Loss That Is Bigger Than Their Fixed Cost

  • Shutting Down And Producing Nothing Would Be Better Than Producing And Having A Larger Loss

• The MC Above AVC Is A Short-run Supply Curve

Entering And Exiting In The Long-run

• Barriers To Entry And Profit

  • Barriers To Entry: The Factors That Prevent New Firms From Entering A Given Market

    • A Market With Low Barriers To Entry Has More Competition, And Individual Firms Make Less Profit

    • A Market With High Barriers To Entry Has Less Competition, And Individual Firms Make More Profit

  • Normal Profit: The Profit Made In An Efficient Competitive Market By Firms That Have Identical Products

    • They Will Break Even And Make No economic Profit