BEHIND THE SUPPLY Profit, Costs,

and
CURVE Production
 BEHIND THE SUPPLY CURVE

Profit
 Profit = Total Revenue – Total Cost
 Primary goal of a firm is to maximize profit
 Can be done in two ways
 Increase revenue
 Reduce costs
 What types of costs exist?
 BEHIND THE SUPPLY CURVE

Types of Costs
 Explicit Costs
 Cost that requires an expenditure (example: tuition)
 Fixed Costs – NOT dependent on level of production
(often time related)
 Variable Costs – Change with level of production (raw
materials)
 Implicit Costs
 Opportunity costs (what have you given up?)
 What are you thinking of giving up going to college?
 THE ULTIMATE MARGINAL ANALYSIS
(AND A TOUCH MACABRE):

How you would spend the last hour of your

life?
 BEHIND THE SUPPLY CURVE

Profit Maximization
 Profit = total revenue – total costs
 New Question to Ask:
 What quantity of output would maximize the
producer’s profit?
 When should a producer stop producing?
 Use marginal analysis to answer the question
 Marginal analysis is all about the NEXT good/dollar/hour
BEHIND THE SUPPLY CURVE
 BEHIND THE SUPPLY CURVE

Principle of marginal analysis

 Proceed until marginal benefit (gains from
producing one more item) EQUALS marginal
cost (cost of producing one more item)
 If MC = MB, STOP
 Finding marginal benefit leads to looking at
marginal revenue
 Marginal revenue – additional revenue generated
from selling one more item
 BEHIND THE SUPPLY CURVE

MR = ∆TR/∆Q
 MR = marginal revenue
 TR = total revenue
 Q = quantity
But wait, we can graph this!
 Marginal cost curve (MC)
 Marginal revenue curve (MR)
BEHIND THE SUPPLY CURVE
BEHIND THE SUPPLY CURVE
 BEHIND THE SUPPLY CURVE

When is production profitable?

 Depends on ECONOMIC ACCOUNTING (taking
into account opportunity cost)
 Economic profit vs. Accounting profit
 Normal profit = Economic profit of 0
 Normal profit is when a firm could do NO better
using their current inputs
 Actually a good thing
 QUICK DISCUSSION

If you are starting an organic farm in

Hudson, what do you purchase/pay for to
make your farm as cost-efficient as
possible?

Details – you need fixed and variable

costs