Econ 101: Chapter 15 Flashcards
Accounting profit
the total revenue a business receives, minus its explicit out of pocket financial costs.
total revenue
all of the income received from all sources.
explicit financial costs
all the money that leaves your business (rent, wages, cost of raw materials)
Accounting profit =
total revenue - explicit financial costs
implicit opportunity costs
includes forgone wages and forgone interest
economic profit
the total revenue a firm receives, minus both explicit financial costs and the entrepreneurs implicit opportunity costs.
Economic profit =
total revenue - explicit financial costs - implicit opportunity costs
Why do accountants and economists disagree on what profit is?
Accountants want to follow where the money goes.
Economists want to make the best decision.
Average revenue
the revenue per unit
average revenue is equal to
price, if you charge everybody the same price.
Average revenue curve is also the
firm demand curve.
average revenue =
(total revenue / quantity ) = price
average cost
the cost per unit
Average cost =
(total cost / quantity) = (fixed cost / quantity) + (variable cost / quantity)
fixed cost
expenses that don’t vary with the quantity you produce.
variable cost
vary with the quantity you produce.
spreading your fixed cost
As you produce a larger quantity, the fixed cost gets “spread” over more and more units.
rising variable cost
Inefficiencies make it increasingly expensive to increase your production.
