Economics Notes Ch1

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Ch1: The Fundamentals of Managerial Economics

* Managerial Economics is the application of microeconomic theory to business decision-making.

Revenue, costs, and profits
* Revenue(TR=total revenue) is gross inflow of money to firm from producing and selling a good

* Costs = 2 kinds of production costs
1. Explicit costs: all costs requiring the firm to pay money to someone (out of pocket costs) 2. Implicit costs: the opportunity costs to the firm of using inputs it owns(land owned by firm, capital owned by firm, owners’ time), doesn’t require firm to pay money (sn: capital is buildings/machines used to produce a product, not money)

* Profits:
1. Accounting profit: Defined as TR – Total explicit costs 2. Economic Profit: Defined as TR – All costs(total explicit+total implicit costs) (Economic Profit=Accounting profit – Total implicit costs) Economic profit < Accounting profit , Accounting profit > Economic profit 3. Negative Economic Profit means that they need to get out of the business 4. If Economic Profit is 0 owners are doing no better and no worse than they could do if they got out of this business and did something else with their time and land or capital. Therefore they are indifferent between staying in this business and getting out of it. We assume that they decide to stay in their current business. If accounting profit is normal then economic profit is 0.

* The Role of Economic profits in our economy:
1. When most firms in a given industry are earing positive economic profit, new firms will enter the industry bringing resources with them. This causes the industry to expand (because there are now more firms) and production of its product to increase. 2. When most firms in a given industry are earning negative economic profit, some firms will leave (even thought they may not necessarily be losing money) taking resources with them. This causes the industry to contract/shrink and production of...
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