Chapter 13: The Costs of Production
implicit costs
input costs that do not require an outlay of money by the firm
explicit costs
input costs that require an outlay of money by the firm
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
average total cost
total cost divided by the quantity of output
profit
total revenue *minus* total cost
economic profit
total revenue minus total cost, including both explicit and implicit costs
accounting profit
total revenue minus total explicit cost
average variable cost
variable cost divided by the quantity of output
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
marginal cost
the increase in total cost that arises from an extra unit of production
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
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
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
efficient scale
the quantity of output that minimizes average total cost
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 fixed cost
fixed cost divided by the quantity of output
Summary
• The goal of firms is to maximize profit, which equals total revenue minus total cost. • When analyzing a firm's behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working at the firm rather than taking another job, are implicit. Economic profit takes both explicit and implicit costs into account, whereas accounting profit considers only explicit costs. • A firm's costs reflect its production process. A typical firm's production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm's total-cost curve gets steeper as the quantity produced rises. • A firm's total costs can be divided between fixed costs and variable costs. Fixed costs are costs that do not change when the firm alters the quantity of output produced. Variable costs are costs that change when the firm alters the quantity of output produced. • From a firm's total cost, two related measures of cost are derived. Average total cost is total cost divided by the quantity of output. Marginal cost is the amount by which total cost rises if output increases by . • When analyzing firm behavior, it is often useful to graph average total cost and marginal cost. For a typical firm, marginal cost rises with the quantity of output. Average total cost first falls as output increases and then rises as output increases further. The marginal-cost curve always crosses the average-total-cost curve at the minimum of average total cost. • A firm's costs often depend on the time horizon considered. In particular, many costs are fixed in the short run but variable in the long run. As a result, when the firm changes its level of production, average total cost may rise more in the short run than in the long run.