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Lecture 1 Part 2 Profits

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10 views

Lecture 1 Part 2 Profits

Uploaded by

mper0084
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ECW2731 Managerial

Economics

Dr. Pauline Khoo


Week 1 Fundamentals of Managerial Economics
Lecture 1.2 Accounting and Economics Profit
The Economics of Effective Management

• Basic principles comprising effective management:

• Identify goals and constraints

• Recognize the nature and importance of profits

• Understand incentives

• Understand markets

• Recognize the time value of money

• Use marginal analysis


Identify Goals

Photo by Jeswin Thomas on Unsplash Photo by Ismael Paramo on Unsplash


Constraints

Photo by Jeswin Thomas on Unsplash Photo by Ismael Paramo on Unsplash


Photo by Julian Hochgesang on Unsplash Photo by Kelly Sikkema on Unsplash
Identify Goals and Constraints

• Well-defined goals

• Firm’s overall goal is to maximize profits

• Constraints make it difficult to achieve goals


• Available technology
• Prices of inputs used in production
Profit

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡, 𝜋 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

𝜋 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

TheAccounting
role of profits 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐸𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡
Profits are a signal to resource holders where resources are most
highly valued by society
Economic 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐸𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡 + 𝐼𝑚𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡
REVENUE
Profit

REVENUE

Total Cost
Profit
(Accounting)

REVENUE

Total Cost
= Explicit
Costs
Profit
(Accounting)

REVENUE

Total Cost
= Explicit
Costs
Profit
(Economic)
Profit
(Accounting)
Implicit
REVENUE Costs

Total Cost Explicit


= Explicit Costs
Costs
Profit
(Economic)
Profit
(Accounting)
Implicit
REVENUE Costs
Total
Opportunity
Total Cost Explicit Costs
= Explicit Costs
Costs
Profit
(Economic)
Profit
(Accounting)
Implicit
REVENUE Costs
Total
Opportunity
Total Cost Explicit Costs
= Explicit Costs
Costs
Recognize the Nature and Importance of Profits

• Accounting profit
• Total amount of money taken in from sales (total revenue) minus
the dollar cost of producing goods or services.

• Economic profit
• The difference between total revenue and cost opportunity cost.
• Opportunity cost
• The explicit cost of a resource plus the implicit cost of giving up
its best alternative.
Recognize the Nature and Importance of Profits

• The role of profits

• Profits are a signal to


resource holders where
resources are most highly
valued by society.

Photo by Carlos Muza on Unsplash


KEY CONCEPTS

§ accounting cost
§ accounting profits
§ constraints
§ economic profits
§ explicit cost
§ goals
§ implicit cost
§ opportunity cost
§ profits

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