Econ 201 1st Edition Lecture 31Outline of Last Lecture 1.policy approaches for public GoodsOutline of Current Lecture 1.Accounting profit and Economic profitCurrent LectureTheory of the Firm: Profit as the Objective• We seek to understand firm behavior to understand market supply.– Firm = Business = Enterprise ~ A producer • Key behavioral assumption: Firms seek to maximize profit.– Profit: Π = TR – TC– Where TR = Total Revenue = P x q and TC = Total Cost. • Total Cost is based on the idea of Opportunity Cost– Opportunity Cost: What is sacrificed to obtain something else. – In this case ~ Revenue from a market is the “something else.”• Total Cost: All costs a firm bears to produce and market its output. – TC is a broad concept: full opportunity cost of production.– TC includes expenses of the firm to acquire necessary inputs and implicit costs ofthe entrepreneur. Accounting Profit vs. Economic ProfitThese 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.• Key difference is in how cost is conceived:– Accounting Cost v. Economic Cost• Accounting cost includes monetary outlays, explicit costs.• Economic cost is a broader concept:– Includes implicit cost and accounting cost. • Implicit costs: Alternative values of the entrepreneur’s time and property used in the firm. – Alternative wage/salary the entrepreneur could have earned– Interest forgone by having financial capital tied up in the firm – Rent forgone by using entrepreneur’s property in the firmAccounting Profit vs. Economic Profit• Profit is Revenue minus Cost• Accounting Profit: TR – Accounting Cost = TR – Expenses• Economic Profit: TR – Economic Cost = TR – (Expenses + Implicit Costs)• Since Accounting Cost ≤ Economic Cost èAccounting Profit ≥ Economic Profit • Economic Profit: Π= TR –
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