The Firm
A firm is an institution that hires factors of production and organizes them to produce and sell goods and services.
The main goal of a firm is to maximize profit.
Types of Costs
Explicit Costs
Costs that involve an actual monetary payment.
Examples:
- Wages
- Raw materials
- Rent
- Interest on borrowed funds
Implicit Costs
Non-monetary opportunity costs of using resources owned by the firm or owner.
Examples:
- Salary the owner gives up by running the business
- Interest the owner gives up by using personal savings
Economic Profit and Accounting Profit
Accounting Profit
Economic Profit
Economic profit is less than or equal to accounting profit because it includes implicit costs.
When economic profit is zero, the firm earns a normal profit.
