Ebook Essential foundations of economics: Part 2
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Ebook Essential foundations of economics: Part 2
250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 at they produce, but they all perform the same basic economic function: They hire factors of production and organize them to produce and sell goods and sen ices. To understand the behavior of a firm, we need to know its goals.■The Firm's CoalIf you asked a group of entrepreneurs what they are trying Ebook Essential foundations of economics: Part 2 to achieve, you would get many different answers. Some would talk about making a high-quality product, others about business growth, others about marEbook Essential foundations of economics: Part 2
ket share, and others about job satisfaction of the work force. All of these goals might be pursued, but they are not the fundamental goal. They are a250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 at do seek to achieve that goal. To calculate a firm's profit, we must determine its total revenue and total cost. Economists have a special way of defining and measuring cost and profit, which we'll explain and illustrate by looking at Sam's Smoothies, a firm that is owned and operated by Samantha. Ebook Essential foundations of economics: Part 2 ■Accounting Cost and ProfitIn 2011, Sam's Smoothies' total revenue from the sale of smoothies was $150,000. The firm paid $20,000 for fruit, yogurt, aEbook Essential foundations of economics: Part 2
nd honey; $22,000 in wages for the labor it hired; and $3,000 in interest to the bank. These expenses totaled $45,000.Sam's accountant said that the d250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 accountants calculate it by using the Internal Revenue Service's rules, which are based on standards set by the Financial Accounting Standards Board. So the accountant reported Sam's Smoothies' total cost for 2011 as $55,000 and the firm's profit as $95,000—$150,000 of total revenue minus $55,000 of Ebook Essential foundations of economics: Part 2 total costs.Sam's accountant measures cost and profit to ensure that the firm pays the correct amount of income tax and to show the bank how Sam's haEbook Essential foundations of economics: Part 2
s used its bank loan. Economists have a different purpose: to predict the decisions that a firm makes to maximize its profit. These decisions respond 250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 reneurship. Another firm could have used these same resources to produce other goods or sendees. In Chapter 3 (pp. 66-67), resources can be used to produce either cell phones or DVDs, so the opportunity cost of producing a cell phone is the number of DVDs forgone. Pilots who fly passengers for South Ebook Essential foundations of economics: Part 2 west Airlines can't at the same time fly freight for FedEx. Construction workers who are building an office high-rise can't simultaneously build apartEbook Essential foundations of economics: Part 2
ments. A communications satellite operating at peak capacity can carry television signals or e-mail messages but not both at the same time. A journali250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 aneously run her smoothies business and a flower shop.The highest-valued alternative forgone is the opportunity cost of a firm’s production. From the viewpoint of the firm, this opportunity cost is the amount that the firm must pay the owners of the factors of production it employs to attract them f Ebook Essential foundations of economics: Part 2 rom their best alternative use. So a firm's opportunity cost of production is the cost of the factors of production it employs.To determine these costEbook Essential foundations of economics: Part 2
s, let's return to Sam's and look at the opportunity cost of producing smoothies.Explicit Costs and Implicit CostsThe amount that a firm pays to attra250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 unt spent could have been spent on something else, an explicit cost is an opportunity cost. The wages that Samantha pays labor, the interest she pays the bank, and her expenditure on fruit, yogurt, and honey are explicit costs.A firm incurs an implicit cost when it uses a factor of production but do Ebook Essential foundations of economics: Part 2 es not make a direct money payment for its use. The two categories of implicit cost are economic depreciation and the cost of the resources of the firEbook Essential foundations of economics: Part 2
m's owner.Economic depreciation is the opportunity cost of the firm using capital that it owns. It is measured as the change in the market value of ca250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 sold her blenders, refrigerators, and shop on December 31, 2010, for $250,000. If she can sell the same capital on December 31,2011, for $246,000, her economic depreciation during 2011 is $4,000. This is the opportunity cost of using her capital during 2011, not the $10,000 depreciation calculated Ebook Essential foundations of economics: Part 2 by Sam's accountant.Interest is another cost of capital. When the firm's owner provides the funds used to buy capital, the opportunity cost of those fEbook Essential foundations of economics: Part 2
unds is the interest income forgone by not using them in the best alternative way. If Sam loaned her firm funds that could have earned her $1,000 in i250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 king for the firm is the wage income forgone by not working in the best alternative job. For example, instead of working at her next best job that pays $34,000 a year, Sam supplies labor to her smoothies business. This implicit cost of $34,000 is part of the opportunity cost of producing smoothies.F Ebook Essential foundations of economics: Part 2 inally, a firm's owner often supplies entrepreneurship, the factor of production that organizes the business and bears the risk of running it. The retEbook Essential foundations of economics: Part 2
urn to entrepreneurship is normal profit. Normal profit is part of a firm's opportunity cost because it is the cost of a forgone alternative—running a250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 Sam's Smoothies.■ Economic ProfitA firm's economic profit equals total revenue minus total cost. Total revenue is the amount received from the sale of the product. It is the price of the output multiplied by the quantity sold. Total cost is the sum of the explicit costs and implicit costs and is th Ebook Essential foundations of economics: Part 2 e opportunity cost of production.Explicit costA cost paid in money.Implicit costAn opportunity cost incurred by a firm when it uses a factor of producEbook Essential foundations of economics: Part 2
tion for which it does not make a direct money payment.Economic depreciationAn opportunity cost of a firm using capital chat it owns—measured as the c250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in wha Ebook Essential foundations of economics: Part 2 t because it is the cost of not running another firm.Economic profitA firm’s total revenue minus total cost.252 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE Ebook Essential foundations of economics: Part 2 250 Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE10.1 ECONOMIC COST AND PROFITThe 20 million firms in the United States differ in size and in whaGọi ngay
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