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

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