The Principles of Economics
13-1 What Are Costs?
13-1a Total Revenue, Total Cost, and Profit
-total revenue: the amount a firm receives for the sale of its output.
-total cost: the market value of the inputs a firm uses in production.
-profit: total revenue minus total cost.
13-1b Costs as Opportunity Costs
-explicit costs: input costs that require an outlay of money by the firm.
-implicit costs: input costs that do not require an outlay of money by the firm.
13-1c The Cost of Capital as an Opportunity Cost
-Accountants and economists think differently.
13-1d Economic Profit versus Accounting Profit
-economic profit: total revenue minus total cost, including both explicit and implicit costs.
-accounting profit: total revenue minus total explicit cost.
13-2 Production and Costs
13-2a The Production Function
-production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good.
-marginal product: the increase in output that arises from an additional unit of input.
-diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases.
13-2b From the Production Function to the Total-Cost Curve
-When the quantity of a good is rapidly produced at large amounts, the total-cost curve is relatively steep.
13-3 The Various Measures of Cost
13-3a Fixed and Variable Costs
-fixed costs: costs that do not vary with the quantity of output produced.
-variable costs: costs that vary with the quantity of output produced.
13-3b Average and Marginal Cost
-average total cost: total cost divided by the quantity of output.
-average fixed cost: fixed cost divided by the quantity of output.
-average variable cost: variable cost divided by the quantity of output.
-marginal cost: the increase in total cost that arises from an extra unit of production.
-Average total cost = total cost / quantity; or ATC = TC/Q.
-Marginal cost = change in total cost / change in quantity; or MC = ∆TC/∆Q.
-The greek letter, ∆, or delta, represents the change in a variable.
13-3c Cost Curves and Their Shapes
-efficient scale: the quantity of output that minimizes average total cost.
13-3d Typical Cost Curves
-The key features included on cost curves are useful in analyzing firm behavior.
-A U-shaped average-total-cost curve is caused by a combination of increasing then diminishing marginal product.
13-4a The Relationship between Short-Run and Long-Run Average Total Cost
-A graph with a longer-run average-total-cost curve is flatter than a shorter-run average-total-cost-curve.
-In the long run, firms are shown to be quite flexible.
13-4b Economies and Diseconomies of Scale
-economies of scale: the property whereby long-run average total cost falls as the quantity of output increases.
-diseconomies of scale: the property whereby long-run average total cost rises as the quantity of output increases.
-constant returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes.
13-5 Conclusion
-Firm cost curves don't show what decisions the firm will make but they help determine that decision.
13-1 What Are Costs?
13-1a Total Revenue, Total Cost, and Profit
-total revenue: the amount a firm receives for the sale of its output.
-total cost: the market value of the inputs a firm uses in production.
-profit: total revenue minus total cost.
13-1b Costs as Opportunity Costs
-explicit costs: input costs that require an outlay of money by the firm.
-implicit costs: input costs that do not require an outlay of money by the firm.
13-1c The Cost of Capital as an Opportunity Cost
-Accountants and economists think differently.
13-1d Economic Profit versus Accounting Profit
-economic profit: total revenue minus total cost, including both explicit and implicit costs.
-accounting profit: total revenue minus total explicit cost.
13-2 Production and Costs
13-2a The Production Function
-production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good.
-marginal product: the increase in output that arises from an additional unit of input.
-diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases.
13-2b From the Production Function to the Total-Cost Curve
-When the quantity of a good is rapidly produced at large amounts, the total-cost curve is relatively steep.
13-3 The Various Measures of Cost
13-3a Fixed and Variable Costs
-fixed costs: costs that do not vary with the quantity of output produced.
-variable costs: costs that vary with the quantity of output produced.
13-3b Average and Marginal Cost
-average total cost: total cost divided by the quantity of output.
-average fixed cost: fixed cost divided by the quantity of output.
-average variable cost: variable cost divided by the quantity of output.
-marginal cost: the increase in total cost that arises from an extra unit of production.
-Average total cost = total cost / quantity; or ATC = TC/Q.
-Marginal cost = change in total cost / change in quantity; or MC = ∆TC/∆Q.
-The greek letter, ∆, or delta, represents the change in a variable.
13-3c Cost Curves and Their Shapes
-efficient scale: the quantity of output that minimizes average total cost.
13-3d Typical Cost Curves
-The key features included on cost curves are useful in analyzing firm behavior.
-A U-shaped average-total-cost curve is caused by a combination of increasing then diminishing marginal product.
13-4a The Relationship between Short-Run and Long-Run Average Total Cost
-A graph with a longer-run average-total-cost curve is flatter than a shorter-run average-total-cost-curve.
-In the long run, firms are shown to be quite flexible.
13-4b Economies and Diseconomies of Scale
-economies of scale: the property whereby long-run average total cost falls as the quantity of output increases.
-diseconomies of scale: the property whereby long-run average total cost rises as the quantity of output increases.
-constant returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes.
13-5 Conclusion
-Firm cost curves don't show what decisions the firm will make but they help determine that decision.