ECON545 Lecture 2 Overview

So far, we have considered demand and supply in markets for goods and services in general. Now, we want to consider some key aspects of the economic behavior of individual business firms. Specifically, we will determine how business firms go about meeting the primary goal of maximizing profits.

Simply stated, profits represent the difference between the total revenue gained from the sale of the firm’s output minus all costs of producing that output. Thus two factors need to be considered when describing profit maximization for all firms:

Revenue is determined by the price at which the output can be sold, so all firms face decisions about the pricing of their product or service.
Production costs vary with output. Some costs are unrelated to the quantity of output (fixed costs), while other costs vary directly with the quantity of output (variable costs). Thus the firm has to understand how its cost patterns behave as output changes.
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