The Behavior Of Firms

The Behavior of Firms -

Objective: MAXIMIZE PROFIT o Pizza…  100 @ $5 each -- total revenue  1 cost $2.50 -- total cost  What is your profit? $250 -- total revenue – total cost

Profit = Total Revenue – Total cost P=TR-TC Total Revenue = price x quantity TR = P x Q Total Cost = total pp cost Ex. Flower and pizza guy Flower: 50$ explicit cost because you actually give money away Pizza Guy: 5$ explicit cost because you actually give money away Require outlay of money Forgone Income – implicit costs do not require an outlay of money TC = explicit costs + implicit costs Accountants only look at explicit money Economists look at both EXAMPLE: to buy factory, you get $300,000 from your savings. (This ___ pays 5% interest per year) from savings 100,000 and borrow from bank 200,000 $5,000 $10,000 (implicit) (explicit) TC= $15,000 Accounting Cost = $10,000 Accounting Cost vs Economic profit production Econ TR

Accoun ting TR

implicit explicit

explicit

Production function*** know this*** 1 import 1 Marginal product = increase of when you hire one more person how will that effect the number of pizzas you produce # of workers 0 1 2 3 4 5 6

output 0 50 90 120 140 150 155

MPL 0 50 40 30 20 10 5

output

150

100

50 1

2

3

4

5

6

# of workers

Marginal ProductIncrease in total out put that exists from 1 extra input As the MLP goes down we call it the diminishing marginal product Slope is higher at beginning and lower at end… dmp is the same thing as the graph!!!