16633 Chapter Notes - Chapter 6: Marginal Product, Marginalism, Diminishing Returns
Document Summary
Assumption: profit maximisation as the motivation for business decisions. Profit maximization: goal has been shown to be a powerful way of explaining the behaviour of managers of firms who are responsible for making decisions about the appropriate level of output or price. Accounting cost and profit: an accountant measures cost and profit according to accounting principles, economists predict the decisions that a firm makes to maximize its profit. Normal profit: the minimum profit necessary to keep a firm in operation, a firm that earns normal profit earns total revenue equal to its total opportunity costs. A fi(cid:396)(cid:373)(cid:859)s economic profit equals total revenue minus total cost. Total cost is the sum of the explicit costs and implicit costs and is the opportunity cost of production. If a firm incurs an economic loss, the entrepreneur receives less than normal profit. Short run versus long run: cost theory is the relationship between output and costs, economists distinguish between the short-run and the long-run.
