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Home
Business
Macroeconomics
["Economic Growth"]
Chapter 13 - The Costs of Production
13-1 What Are Costs?
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.
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.
The Cost of Capital as an Opportunity Cost
Accountants and economists think differently.
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
The Production Function
Production function: the relationship between the number 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.
From the Production Function to the Total-Cost Curve
When the quantity of a good is rapidly produced in large amounts, the total-cost curve is relatively steep.
13-3 The Various Measures of Cost
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.
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.
Cost Curves and Their Shapes
Efficient scale: the quantity of output that minimizes average total cost.
Typical Cost Curves
The key features included in cost curves are useful in analyzing firm behavior.
A U-shaped average-total-cost curve is caused by a combination of increasing than diminishing marginal product.
13-4 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.
Economies and Diseconomies of Scale
Economies of scale: the property whereby long-run average total cost falls as the number of output increases.
Diseconomies of scale: the property whereby long-run average total cost rises as the number of output increases.
Constant returns to scale: the property whereby long-run average total cost stays the same as the number of output changes.
13-5 Conclusion
Firm cost curves don't show what decisions the firm will make but they help determine that decision.
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