U3 M52 My Notes

Explicit Costs

• out of pocket costs, payments made by firms for using resources of others

• Ex. rent, wages, materials, electricity bills

Implicit Costs

• the opportunity costs that firms “pay” for using their own resources

  • ex. forgone wages, forgone rent, time

Economic Profit - Total Revenue - economic costs

• economic costs = explicit + implicit costs

Accounting profit is usually greater than economic profit

Normal Profit

• break even and make no economic profit

• total revenue = explicit plus implicit costs

Maximizing Profit can also be minimizing losses

Short-Run Profit Maximization

• to maxi profit, firms must make the right output

• Firms should continue to produce until additional revenue from each new output equals the additional cost