Chapter 13: The costs of production
Fixed Costs
Some costs, called fixed costs, do not vary with the quantity of output produced. They are incurred even if the firm produces nothing at all. Conrad's fixed costs include any rent he pays because this cost is the same regardless of how much coffee he produces.
Variable Costs
Some of the firm's costs, called variable costs, change as the firm alters the quantity of output produced. Conrad's variable costs include the cost of coffee beans, milk, sugar, and paper cups: The more cups of coffee Conrad makes, the more of these items he needs to buy.
Total Revenue
the amount a firm receives for the sale of its output
Marginal Product
the increase in output that arises from an additional unit of input When the number of workers goes from 1 to 2 , cookie production increases from 50 to 90 , so the marginal product of the second worker is cookies.
Marginal Cost
the increase in total cost that arises from an extra unit of production =Change in total cost/change in quantity
Total Cost
the market value of the inputs a firm uses in production
Economies of Scale
the property whereby long-run average total cost falls as the quantity of output increases Economies of scale often arise because higher production levels allow specialization among workers, which permits each worker to become better at a specific task.
Diseconomies of Scale
the property whereby long-run average total cost rises as the quantity of output increases Diseconomies of scale can arise because of coordination problems that are inherent in any large organization.
Constant Returns to Scale
the property whereby long-run average total cost stays the same as the quantity of output changes
Efficient Scale
the quantity of output that minimizes average total cost
Production Function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
Economic Profit
total revenue minus total cost, including both explicit and implicit costs
Accounting Profit
total revenue minus total explicit cost
Graphs for Costs:
AVC (Average Variable Cost), AFC (Average Fixed Cost), ATC (Average Total Cost), AMC (Average Marginal Cost)
Rising Marginal Cost
Conrad's marginal cost rises as the quantity of output produced increases. This upward slope reflects the property of diminishing marginal product. When Conrad produces a small quantity of coffee, he has few workers, and much of his equipment is not used.
The total cost curve gets steeper as quantity of output increases because?...
Diminishing Marginal Product
Average Fixed Cost
Fixed Cost/ quantity of units produced
Important Cost curve things to remember
Marginal cost eventually rises with the quantity of output. The average-total-cost curve is U-shaped. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
Total Cost Curve
The total-cost curve gets steeper as the amount produced rises, whereas the production function gets flatter as production rises. These changes in slope occur for the same reason. High production of cookies means that Caroline's kitchen is crowded with many workers. Because the kitchen is crowded, each additional worker adds less to production, reflecting diminishing marginal product. Therefore, the production function is relatively flat. Whereas the Total Cost Curve is steep
U-shaped Average Total Cost
To understand why, remember that average total cost is the sum of average fixed cost and average variable cost. Average fixed cost always declines as output rises because the fixed cost is spread over a larger number of units.
Average Variable Cost
Variable Cost/ quantity of units produced
Firms production costs...
When economists speak of a firm's cost of production, they include all the opportunity costs of making its output of goods and services.
The relationship between Marginal Cost and Total Cost
Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising. ATC is like calculating GPA This relationship between average total cost and marginal cost has an important corollary: The marginal-cost curve crosses the average-total-cost curve at its minimum.
A firm that makes a positive economic profit...?
Will stay in business
Profit
firm's total revenue minus its total cost: Profit = Total Revenue - Total Cost
Finding the cost of the typical unit being produced/ Average Total Cost
firms cost/quantity of units produced
Diminishing Marginal Product
he property whereby the marginal product of an input declines as the quantity of the input increases
Implicit Costs
input costs that do not require an outlay of money by the firm. Total cost of a business is a total or Explicit and Implicit Costs
Explicit Costs
input costs that require an outlay of money by the firm