Profit Maximization

1
Profit Maximization

• Profit total revenue minus all costs- explicit
  and implicit costs
• Normal Profit return to the entrepreneur ( is a
  cost of production)

2
Production

• Factor of Production an input used in the
  production of a good or service
• Short Run a period of time sufficiently short
  that at least some of the firms factor of
  production are fixed.

3
Profit Maximization

• Explicit Costs the actual payments a firm makes
  to its factors of production and other suppliers
• Implicit Costs the opportunity cost of the
  resources supplied by the firms owners

4
Profit Maximization

• Accounting Profit the difference between total
  revenue and explicit costs
• Economic Profit (Profit) the difference between
  the firms total revenue and the sum of its
  explicit and implicit costs

5
Profit Maximization

• Normal Profit the firms total revenue minus
  its explicit costs
• Economic Loss an economic profit that is less
  than zero

6
Profit Maximization

• Information for Matts Marvelous Web Design
  Company
• Total revenue from web design services 100,000
• Software and computer costs 5,000
• Rent and Utilities 20,000
• Quit his 60,000 a year job
• Advertising 5,000
• Invested 40,000 of savings (interest rate is 5)
• Wages for secretary 15,000

7
Costs in the short run

• Fixed Cost the sum of all payment made to the
  firms fixed factors of productionVariable Cost
  - the sum of all payment made to the firms
  variable factors of production

8
Costs in the short run

• Total Cost the sum of all payments made to the
  firms fixed and variable factors of
  productionMarginal Cost as output changes
  from one-level to another the change in total
  cost is divided by the corresponding change in
  output

9
Costs in the short run

• TC FC VC or
• VC TC FC or
• FC TC - VC

10
Costs in the short run

• Average total cost (ATC) total cost divided by
  total output
• ATC
• ATC x Q TC

11
Costs in the short run

• Average variable cost (AVC) variable cost
  divided by total output
• AVC VC/Q
• AVC x Q VC

12
Costs in the short run

• Marginal Cost as output changes from one-level
  to another the change in total cost is divided by
  the corresponding change in output

13
Costs in the short run

• Marginal Cost (MC) the additional cost of
  producing an additional unit of a good.
• MC