Study GuideEconomics–Theory of the Firm1. Production Costs and Firm Profits1.1The Firm’s GoalThe main goal of a firm is tomaximize profit.Profit depends on two things:•Revenue(money earned from selling output)•Costs(money spent to produce output)Because costs reduce profits, understanding different types of costs is very important for decidinghow much output a firm should produce.1.2Explicit and Implicit CostsExplicit costsare the direct, out-of-pocket payments made by a firm.These include:•Wages paid to workers•Payments for raw materials•Fees paid to lawyers, bankers, or consultantsThese costs are easy to see and are recorded in accounting books.1.3Implicit CostsImplicit costsare theopportunity costsof using the firm’s own resources without receiving directpayment.Examples:•If the firm uses itsown building, it gives up rent it could have earned.•If the owner works in the firm without taking a salary, they give up wages they could earnelsewhere.Preview Mode
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