total cost: the total of out-of-pocket costs; normal rate of return; and opportunity cost of each factor of production.
rate of return: the annual flow of net income generated by an investment expressed as a percentage of the total investment.For example, if someone makes a $100000 investment in capital to start a small restaurant and the restaurant produces a flow of profit of $15000 every year, then the project has a rate of return of %15.
Profit/total investment
A normal rate of return: a rate of return on capital that is sufficient to keep owners and investors satisfied.When a firm earns exactly a normal rate of return, it is earning a zero profit as we have defined profit. If the level of profit is positive, the firm is earning an above-normal rate of return on capital.
Calculating Total revenue, Total cost, and Profit
Initial investment $20000
Market interest rate available (the rate of interest that they could have gotten by purchasing corporate bonds) 10%
Total revenue $30000 (3000 belts and 10 dollars each)
Costs
Belts from suppliers $15000
Labor cost $14000
Normal return/opportunity cost of capital $20000 * 10%= $2000
Total cost $2000
profit (total revenue-total cost) -$1000
(Investment is sunk cost)
The available production techniques and the prices of inputs determines costs.
production technology: the quantitative relationship between inputs and outputs
Marginal product: the additional output that can be produced by adding one more unit of a specific input
the law of diminishing returns:When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
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