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