Chapter 3 Appendix Outline
A. Assumptions Concerning Producer Behavior
1. Economists assume that producers attempt to maximize profits.
a. Profits are total revenues minus total costs.
1. Total costs include both explicit and implicit costs.
a. Explicit costs are direct monetary outlays made by the producer.
b. Implicit costs are the producer's opportunity costs for which there are no direct monetary outlays: time costs, for instance.
2. In deciding what quantity to produce each producer must compare marginal cost with the market price of the good.
a. Production should be carried out to the point at which marginal cost, the cost of producing an additional unit of a good, is equal to price.
1. If price is greater than marginal cost, the producer's profits can be increased by producing the unit.
2. If marginal cost is greater than price, the producer's profits will bedecreased by producing the unit.
3. Since profits are increased when price is greater than marginal cost,and profits are decreased when price is less than marginal cost, profits must be at a maximum when price is equal to marginal cost.
b. By producing at the point where price and marginal costs are equal, not only are profits for each producer maximized, but the good is produced in the cheapest possible way.

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