Chapter 5: Production Cost
One source of economies of scale is the mathematics of
Circles
Business operating decisions should be based on
economic profit
The shape of the long-run average total cost curve can differ for different types of firms depending on
how much production it takes to reach the minimum long-run average cost.
One reason for dis-economies of scale is increasing
opportunity cost
Implicit cost
opportunity cost of using owned resources
Average fixed cost
total fixed cost/amount of output produced
Accounting profit
total revenue - the explicit cost of production
On graph: marginal product
always intersects the average product at the maximum of the average product
The vertical distance between the average variable cost and average total cost curves gets smaller as more output is produced, because this distance is equal to the
average fixed cost, which declines as output increases
Total cost per unit is equal to
average total cost: ATC=TC/Q or AFC + AVC
On graph: Average total cost
above average fixed and average variable costs
On graph: Average variable cost
above average fixed cost but below average total cost
Marginal Product
additional output produced as a result of utilizing one more unit of a variable resource
On graph: Average fixed cost
declines throughout the range of output
Marginal Cost
extra or additional cost associated with the production of an additional unit of output
Economies of scale is a condition inwhich
the long-run average total cost of production decreases as production increases
Dis-economies of scale is a condition in which
the long-run average total cost of production increases as production increases
