TAILIEUCHUNG - Lecture Economics - Chapter 7: Production costs

After studying this chapter you will be able to understand: Why are multi-screen movie theatres replacing single-screen theaters? What is the difference between the short-run and the long-run? Why would an accountant say a firm is making a profit and an economist say it’s losing money? | Chapter 7 Production Costs Key Concepts Summary Practice Quiz Internet Exercises ©2000 South-Western College Publishing * In this chapter, you will learn to solve these economic puzzles: Why would an accountant say a firm is making a profit and an economist say it’s losing money? What is the difference between the short-run and the long-run? Why are multi-screen movie theatres replacing single-screen theaters? * What is a basic assumption in economics? The motivation for business decisions is profit maximization * To understand Profit, what is necessary? To distinguish between the way economists measure costs and the way accountants measure costs * What are Explicit Costs? Payments to nonowners of a firm for their resources * What are Implicit Costs? The opportunity costs of using resources owned by the firm * What is an example of Implicit Costs? When you invest your nest egg in your own enterprise, you give up earning interest on that money * How is Accounting Profit defined? Total revenue minus total explicit costs * What are Total Opportunity Costs? Explicit costs + Implicit costs * What is Economic Profit? Total revenue minus total opportunity costs * Computech’s Accounting Versus Economic Profit Total Revenue Less Explicit costs: Wages & salaries Materials Interest paid Other payments Less implicit costs: Foregone salary Foregone rent Foregone interest Equals profit $500,000 $400,000 $50,000 $10,000 $10,000 0 0 0 $30,000 Item Accounting Profit Economic Profit Exhibit 1 $500,000 $400,000 $50,000 $10,000 $10,000 50,000 10,000 5,000 -$30,000 * What is Normal Profit? The minimum profit necessary to keep a firm in operation * When economists use the term “Profit”, which profit do they mean? Economic profit which, unlike accounting profit, includes implicit costs * What is a Fixed Input? Any resource for which the quantity cannot change during the period of time under consideration * What is the Short Run?

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