The Principles of Economics

13.  The Costs of Production

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.