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