ECON 201 1st Edition Lecture 8I. Organizing Production π = Profitnet = MinusA.) Economic Profit vs. Accounting Profit - π = TR – TCo π = total revenue – total costB.) Costs- Explicit vs. Implicit costs o Explicit costs are those that are paid directly Wage bill Materials cost Utilities Technology R&Do Implicit costs are incurred but not paid directly Opportunity o Economic Profit (π) is total revenue net explicit and implicit cost Includes opportunity costs.o Accounting π is total revenue net explicit costs Suppose Betsy makes $25,000 year working at Petsmart. She decides to open her own consulting firm, which earns $80,000 revenue for the first year. Her supplies, wages and utilities cost her $60,000. Accounting π = 80,000 – 60,000 = $20,000 (business remains solvent) Economic π = 80,000 – 60,000 – 25,000 = -5,000C.) Technological vs. Economic Efficiency - Making 20 computers- Method A combines 10 units of labor and requires you to use 500 units of capital (technologically more efficient than B)- Method B combines 15 units of labor and requires you to use 500 units of capital- Method C combines 5 units of labor and requires you to use 600 units of capital (technologically more efficient than A conserve more on labor than capital) - Method B is technologically efficient. Firms will choose between A and C based on the total cost- Suppose labor cost $10,000 each and Capital cost $1,000 each unito Method A TC = $10,000 + $500,000 = $600,000o Method C TC = $50,000 + $600,000 = $650,000These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Factor biased technologies o Method A is the economically more efficient - Efficient = saves on cost; it is the least costly method of production D.) Firm Costs/ Production - Total Product o The total product curve for a firm is the maximum that a firm can produce with agiven amount of inputs o Graph: o If you add an additional input do you get more outcome? Convex Function Increasing Marginal Returns Diminishing Marginal Returns Decreasing Marginal Returns (“Too many cooks in the kitchen”) - Marginal Product (one more)o The additional output from one additional input hired.o MP = ∆Q/∆L- Average Producto AP = Q/L (output/input) - Relationship between the margin and average –interrelated o If the margin > average then average is rising GPA: If your GPA for winter term is higher than your accumulative then your average will go upo If the margin < average then average is fallingo Likewise for
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