Any firm’s aims at to maximize its profits.

Profit = Total Revenue – Total Cost.

π=R – C

 Total Revenue: The amount a firm receives for the sale of its output.
 Total Costs: The market value of the inputs a firm uses in production.

Explicit vs Implicit Costs

 Explicit Costs: the costs that require an outlay of money such as paying
wages.
 Implicit Costs: the costs that do not require a cash spending such as the
opportunity cost.

Economic Profit vs Accounting Profit

 Accounting Profit: the total revenue minus total explicit costs.
 Economic profit: the total revenue minus total costs (explicit and implicit)

So accounting profit tends to be higher than economic profit.

The production Function: it shows the relationship between quantity of inputs used
to make a good and the quantity of output of that good.
Marginal Product (MP): the increase in output that arises from an additional unit
of that input.

∆Q
Marginal Product of Labor (MPL) =
∆L

Marginal Product of Labor is important because the firm uses it to compare the
benefits from hiring an additional worker to the cost of this worker.

As we see, MPL diminishes as L rises.

Diminishing Marginal Product: the marginal product of an input declines as the

quantity of input increases.

Marginal Cost (MC): the increase in Total Cost from producing one more unit.

∆ TC
Marginal Cost (MC) =
∆Q
If the cost of additional product (MC) is less than the revenue he would get
from selling it, then profits rise if firm produces more.