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