The assumption we make about producers is that they maximize profits . To understand profit maximization we need to understand how revenues are determined and how costs are determined. Chapter 8 of the book is concerned primarily with the relationship between the firm s costs and its output. Profits and Costs Profit maximization by firms implies cost minimization a firm cannot be maximizing its profits if it is not producing at the lowest cost possible. When economists talk about profits and costs they use the terms differently than say accountants would.
Firms make profits by producing and selling goods.
Economic cost is the value of the inputs used in production, where that value is determined by the principle of opportunity cost. Economic profit is the difference between the revenues received by the firm from the sale of its output and the opportunity cost of all the inputs used to produce the output. Losses revenues less than opportunity costs resources are worth less used in this business than in their best alternative use. Breaking-even revenues equal to opportunity costs resources are worth as much in this business as in their best alternative use. It has to do with what it tells us about resource allocation.