Costs, Perfect Competition, Monopolies, Monopolistic Competition

What are Costs? * Goal of a firm is to maximize profit * Total Revenue = Q x P * Total Cost = market value of inputs firm uses in production * Profit = TR – TC * Costs of production = opportunity costs of output of goods and services * Explicit costs = input costs that require outlay of money by firm * i.e. $1000 spent on flour = opportunity cost of $1000 because can’t be spent elsewhere * Implicit costs = input costs that do not require outlay of money by firm * i.e. working as baker at $10/hour, but could be making $20/hour as a computer analyst * Economists include both costs, while accountants often ignore implicit costs * Important implicit cost = opportunity cost of capital * i.e. use $300,000 savings to buy factory, but could have invested it at interest rate of 5%/year * ∴ forgone $15,000/year in interest income = implicit opportunity cost of business * i.e. use $100,000 savings and borrow $200,000 from bank * Explicit cost will now include $10,000 paid to bank in interest * Opportunity cost is still $15,000 (OC of $10,000 paid to bank is $10,000 and there is a forgone interest savings of $5000) * Economic profit = TR – TC (including both explicit and implicit costs) * Accounting profit = TR – TEC (total explicit costs) * Consequently, accounting profit is often > economic profit * For economist, business is only profitable if it can cover all explicit and implicit costs
Production & Costs * In short run = size of factory is fixed because it cannot be built overnight, but output can be varied by varying the number of workers * In long run = size of factory and number of workers can be varied * Production function: relationship b/w quantity of inputs used to make a good and the quantity of output of that good (short-run) * Marginal product = increase in output that arises from additional unit of input * MP = ∆TP/∆Q * Law of diminishing marginal