Exam 2 is in one week on Thursday, April 3rd, covering chapters 6, 7, 8, and 9.
Review day is Tuesday, April 1st.
Quizzes for chapters 8 and 9 are available.
Chapter 13 will be covered today but is not part of Exam 2; it will be on Exam 3 during finals week.
Chapter Overview
This chapter is considered a little intense and potentially boring, although many business students find it interesting.
The chapter includes numerous graphs.
Understanding the underlying principles is crucial, even though findings will be summarized.
This chapter is fundamental for understanding chapters 14 and 15.
What are Costs?
Total Revenue: The amount a firm receives from the sale of its output.
Total Cost: The market value of the inputs a firm uses in production.
Profit: Total revenue minus total cost.
Explicit vs. Implicit Costs
Explicit Costs: Input costs that require a direct monetary outlay by the firm.
Examples: Payments to workers, for capital, and for land.
Implicit Costs: Input costs that do not require a direct monetary outlay by the firm.
Examples: Opportunity costs of time or money, often ignored by accountants.
Total Costs: The sum of explicit and implicit costs.
Economic Profit vs. Accounting Profit
Economic Profit: Total revenue minus total cost (including both explicit and implicit costs).
Accounting Profit: Total revenue minus total explicit costs.
Economists vs. Accountants
Economists consider all opportunity costs (both explicit and implicit) when analyzing a firm.
Accountants only measure explicit costs.
Therefore, economic profit is typically smaller than accounting profit.
Clicker Question: Jacqui's Business
Jacqui earns $50,000 in accounting profit in her first year of business.
She turned down job offers with annual salaries of $30,000, $40,000, and $45,000.
To calculate Jacqui's economic profit, we subtract the highest salary she turned down (opportunity cost) from her accounting profit: $50,000 - $45,000 = $5,000.
Therefore, Jacqui's economic profit is $5,000.
Production Function and Marginal Product
Production Function: The relationship between the quantity of inputs used to produce a good and the quantity of output of that good.
Marginal Product: The increase in output that arises from an additional unit of input.
Fixed vs. Variable Costs
Fixed Costs: Costs that do not vary with the quantity of output produced.
Variable Costs: Costs that vary with the quantity of output produced.
Total Cost: Fixed cost plus variable cost.
Total-Cost Curve: Shows the relationship between the quantity produced and total costs.
Production and Costs Relationship
At low levels of production, marginal product (MP) is typically high because few people have access to many machines, making each worker highly productive.
Law of Diminishing Returns: As more inputs are added, at some point, it becomes less effective to hire more people, and the MP diminishes as the number of inputs increases, leading to a