McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 5
Firm Production, Cost, and
Revenue
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter Outline
•Production
•Costs
•Revenue
•Profit and Profit Maximization
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Basic Definitions
•Profit: The money that business
makes: Revenue minus Cost
•Cost: the expense that must be
incurred in order to produce goods for
sale
•Revenue : the money that comes into
the firm from the sale of their goods
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Economic vs. Accounting Cost
•Economic Cost: All costs, both those
that must be paid as well as those
incurred in the form of forgone
opportunities, of a business
•Accounting Cost: Only those costs
that must be explicitly paid by the owner
of a business
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Production
•Production Function: a graph which
shows how many resources we need to
produce various amounts of output
•Cost Function: a graph which shows
how much various amounts of
production cost