Costs of Production

Industrial Organization

The study of firms and market structure.

Goal of the firm

maximize profit

profits

total revenue - total costs

total revenue

Price x Quantity

economic costs

explicit costs + implicit costs

The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

implicit costs

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

accounting profit

total revenue - explicit costs

economic profit

total revenue - explicit costs - implicit costs

short run

the period of time during which at least one of a firm's inputs is fixed

long run

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

total product

total output or production by a firm

marginal product

extra output due to the addition of one more unit of input

change in total product/change in larbor input

average product

output per unit of a particular input (labor productivity)

total product/units of labor

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.

fixed costs

Costs that do not vary with the quantity of output produced

variable costs

costs that change as output changes

total costs

the sum of the fixed and variable costs for any given level of production

Average fixed cost (AFC)

TFC/Q

Per-Unit, or Average Costs

can be used to compare to product price

Average variable cost (AVC)

TVC/Q

Average total cost (ATC)

TC/Q

Marginal cost (MC)

the extra cost incurred by producing one more unit of a product

ΔTC/ΔQ

short run costs