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Accounting profits
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profits that only considers the explicit costs in total costs.
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Explicit Costs
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Cost that one pays: There is a "Bill" or "Receipt". IE. Wages, material costs, utilities... etc.
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Normal profits
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Income received by the entrepreneur or owner of a firm. Normal profits are an explicit cost; wage to the owner.
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Economic profits
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Profits that considers the explicit and implicit costs in total cost.
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Implicit costs
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Opportunity costs of using a firms resources it owns. IE; depreciateion, interest payments, owners time
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Economic profits =
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Total Revenue- total cost
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Total cost =
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Explicit costs + implicit costs
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Command System
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Boss gives direction to workers... workers give feedback to the boss
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Incentive system
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Encourage workers to maximize profits rather than just a paycheck. IE; commission
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symmetrical/asymetrical information
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Everyone has same information//Some people have different information
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Adverse Selection
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When the buyers and sellers have different amount of information.
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Moral Hazard
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More likely to engage in riskier behavior because others bear the cost of the action. IE; Person with car insurance might drive more reckless because the insurance will cover it.
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Principal agent problem
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When the owner and workers self interests don't align
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proprietorship
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single owner to a firm
Get all benefits and make decisions and incur liability.
Get all benefits and make decisions and incur liability.
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Partnership
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two or more owners to a firm
Split benefits and costs but both have liabilities.
Split benefits and costs but both have liabilities.
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Corporation
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a legal entity owned by individual stockholders and authorized by gov
Cannot sue stockholders
Cannot sue stockholders
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Short run
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at least one input is fixed
Capital is fixed, labor is variable
Capital is fixed, labor is variable
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Long run
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all inputs are variable
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Sunk costs
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costs already incurred and cannot be recovered
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marginal product
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Total goods produced / inputs
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Economies of scale
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As quantity increases, long run costs decrease
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Constant Returns to scale
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As quantity increases, long run costs remain constant
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diseconomies of scale
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as quantity increases, long run costs increase.
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Price-taker
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a buyer or seller that is unable to affect the market price
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Perfectly competitive firm is...
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perfectly elastic (-----)
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Nigel quits his $50,000 per year job to open his own business. The business generates $70,000 in total revenue after one year. This will cost him $10,000 in office supplies. (calculate economic and accounting profit)
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Accounting: $60,000
Economic: $10,000
Economic: $10,000
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Suppose Jen decided to open her own café. At the start, she used $50,000 of her savings, that was gaining 10% interest each year, to buy coffee machines. Over the course of one year, her total revenue was $200,000. The coffee machines depreciated 20% of their original value. She also spent $20,000 on ingredients, $40,000 on wages, and $40,000 on a location. Jen paid herself $60,000. She also declined a job offer at the beginning of the year to be a manager for $70,000. (Calculate economic and accounting profit)
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Accounting: 40,000 (200,000-160,000)
Economic: -45,000 (200,000-160,000-85,000)
Economic: -45,000 (200,000-160,000-85,000)
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