Cost Function for Firms

7.3 of The Economy 1.0 & The Economy #4

What does the opportunity cost of capital entail?

-The amount of income an investor could have received by investing the unit of capital elsewhere.

For a firm, what will be the costs of producing goods?

-Cost of having a premise, like a factory

-Cost of having capital goods, specifically designed for you

-Cost of all the inputs in the production process

-Cost of incentivising shareholders to continue their investments.

Seeing this graph, what will the firm’s average cost curve look like, generally speaking?

-Take calculations at 20, 40 and 60 units

-Note the shape:

-The firm experiences diminishing average costs at low levels of production, and then increasing average costs at high levels of production.

What does marginal cost entail?

-Effect on total cost of producing one additional unit of output

-Corresponds to slope of the total cost function at each point.

Given this, where would you plot the marginal cost?

-It starts below the average cost curve, and intersects at its bottom.

-This makes sense, if the cost of each additional unit is less than the average, then the average will fall.