Behind the Supply Curve Profit Profit Total Revenue Total Cost Primary goal of a firm is to maximize profit Can be done in two ways Increase revenue Reduce costs What types of costs exist ID: 1028224
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1. Profit, Costs, and ProductionBehind the Supply Curve
2. Profit Profit = Total Revenue – Total CostPrimary goal of a firm is to maximize profitCan be done in two waysIncrease revenueReduce costsWhat types of costs exist?Behind the Supply Curve
3. Types of CostsExplicit CostsCost that requires an expenditure (example: tuition)Fixed Costs – NOT dependent on level of production (often time related)Variable Costs – Change with level of production (raw materials)Implicit CostsOpportunity costs (what have you given up?)What are you thinking of giving up going to college?Behind the Supply Curve
4. How you would spend the last hour of your life?The ultimate marginal analysis (and a touch macabre):
5. Profit MaximizationProfit = total revenue – total costsNew Question to Ask:What quantity of output would maximize the producer’s profit?When should a producer stop producing?Use marginal analysis to answer the questionMarginal analysis is all about the NEXT good/dollar/hourBehind the Supply Curve
6. Behind the Supply Curve
7. Principle of marginal analysisProceed until marginal benefit (gains from producing one more item) EQUALS marginal cost (cost of producing one more item)If MC = MB, STOPFinding marginal benefit leads to looking at marginal revenueMarginal revenue – additional revenue generated from selling one more itemBehind the Supply Curve
8. MR = ∆TR/∆Q MR = marginal revenueTR = total revenueQ = quantityBut wait, we can graph this!Marginal cost curve (MC)Marginal revenue curve (MR)Behind the Supply Curve
9. Behind the Supply Curve
10. Behind the Supply Curve
11. When is production profitable?Depends on ECONOMIC ACCOUNTING (taking into account opportunity cost)Economic profit vs. Accounting profitNormal profit = Economic profit of 0Normal profit is when a firm could do NO better using their current inputsActually a good thingBehind the Supply Curve
12. If you are starting an organic farm in Hudson, what do you purchase/pay for to make your farm as cost-efficient as possible?Details – you need fixed and variable costsQuick Discussion