Question

Do you think optimal hiring will give businesses economic profits?

Think about this week's topics. Explain your answers.

(CO C) Economies of Scale Reductions in the Average Total Cost (ATC) of producing a product as the firm expands the SIZE of plant (its output) in the long run; the Economies of Mass Production!

(CO C) Economic Profit The Total Revenue [TR] of a firm minus its Economic Costs (which include both “Explicit Costs and Implicit Costs”); also called "pure profit" and "above-normal profit."

Answer 1

Optimal hiring is essential because it increases economic profit if at the current level of hiring, the minimum efficient scale is not achived. Note that Economies of scale are present when the firm is operating at a falling portion of the long run ATC so that with increased production, ATC falls. This continues till the minimum efficient scale is achieved. For economic profits, production efficiency is desirable and for this, optimal level of hiring is necessary

If too many workers are hired, it implies diminishing marginal returns and increasing marginal costs. This is not an optimal condition because what each worker is adding to the revenue, is less than what it is costing to the firm. Optimal rule for hiring involves paying workers a wage that equates the value of their marginal product. Hence hiring should continue as long as wage rate is lower than this level and workers should be continued to laid off as long as wage rate is higher than their value of marginal product.

Economic profit is different from accounting profit where the latter excludes implict costs. These are the costs borne by the firm when it does not make explicit payment for actions but these actions bear an opportunity cost. Hence economic profits should be given preferences over acccounting profit. Optimal hiring will reduce both explicit and implict costs and these increases the difference between revenue and costs, which is the economic profit.