Chapter 7
A Firm's Profit
Profit = Total revenue - Total cost
Total Cost
The amount that the firm pays to buy inputs.
Explicit costs
involve a direct money outlay for factors of production.
long run
no fixed scale of production, firms can either enter or exit an industry
short run
operating at a fixed scale of production, firms can neither enter nor exit an industry
The long run is best defined as a time period ...
that is long enough to change all factors of production.
One thing that distinguishes the short run and the long run is ...
the existence of fixed costs.
Accounting Profit
Accountants measure the accounting profit as the firm's total revenue minus only the firm's EXPLICIT costs. In other words, they ignore the implicit costs.
Implicit costs
do not involve a direct money outlay.
average product
total output/# of workers
Marginal Product
Additional output/additional input
Economic Profit
Economists measure a firm's economic profit as total revenue minus all the opportunity costs (explicit and implicit).
Total Revenue
The amount that the firm receives for the sale of its output.
production function
The production function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.