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Lecture Principles of economics - Chapter 5: The costs of production

In lecture Principles of economics - Chapter 5 you will: Examine what items are included in a firm’s costs of production, analyze the link between a firm’s production process and its total costs, learn the meaning of average total cost and marginal cost and how they are related, consider the shape of a typical firm’s cost curves, examine the relationship between short-run and long-run costs. | 5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 13 The Costs of Production The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium. WHAT ARE COSTS? According to the Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. This results in a supply curve that slopes upward. WHAT ARE COSTS? The Firm’s Objective The economic goal of the firm is to maximize profits. Maximum Profits Total Revenue, Total Cost, and Profit Total Revenue The amount a firm receives for the sale of its output. Total Cost The market value of the inputs a firm uses in production. Total Revenue, Total Cost, and Profit Profit is the firm’s total revenue minus its total cost. Profit = Total revenue - Total cost Costs as Opportunity Costs A firm’s cost of production . | 5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 13 The Costs of Production The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium. WHAT ARE COSTS? According to the Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. This results in a supply curve that slopes upward. WHAT ARE COSTS? The Firm’s Objective The economic goal of the firm is to maximize profits. Maximum Profits Total Revenue, Total Cost, and Profit Total Revenue The amount a firm receives for the sale of its output. Total Cost The market value of the inputs a firm uses in production. Total Revenue, Total Cost, and Profit Profit is the firm’s total revenue minus its total cost. Profit = Total revenue - Total cost Costs as Opportunity Costs A firm’s cost of production includes all the opportunity costs of making its output of goods and services. Explicit and Implicit Costs A firm’s cost of production include explicit costs and implicit costs. Explicit costs are input costs that require a direct outlay of money by the firm. Implicit costs are input costs that do not require an outlay of money by the firm. Economic Profit versus Accounting Profit Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs. Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. Economic Profit versus Accounting Profit When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than accounting profit. Figure 1 Economic versus Accountants Copyright © 2004 South-Western Revenue Total opportunity costs How an Economist Views a Firm How an Accountant Views a Firm Revenue Economic profit Implicit costs .