Chapter 13 The Costs of Production

According to the Law of Supply:

- Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. - This results in a supply curve that slopes upward.

Three Important Properties of Cost Curves

1. Marginal cost eventually rises with the quantity of output. 2. The average-total-cost curve is U-shaped. 3. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

ATC=

TC/Q

PROFIT =

TOTAL REVENUE (TR) - TOTAL COST (TC)

The average total-cost curve is _________________.

U-shaped

Fixed Costs

are those costs that do not vary with the quantity of output produced.

Variable Costs

are those costs that do vary with the quantity of output produced.

fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity output produced

Some of the opportunity costs, such as the wages a firm pays its workers, are ___________.

explicit

average fixed cost

fixed cost divided by the quantity of output

Average total cost declines as _______________________.

output increases

In the short run, ________________________________

some costs are fixed.

Modern microeconomics is about

supply, demand, and market equilibrium

Economic Profit

takes both explicit and implicit costs into account, whereas accounting profits considers only explicit costs.

total revenue

the amount a firm receives for the sale of its output

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

When the marginal product declines, ____________________________________________.

the production function becomes flatter.

Goal of firms =

to maximize profit, which equals total revenue minus total cost

economic profit

total revenue MINUS toal cost, including both explicit and implicit costs

accounting profit

total revenue MINUS total explicit cost

profit

total revenue minus total cost

average variable cost

variable cost divided by the quantity of output

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 if an input declines as the quantity of the input increases.

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 the good

explicit costs

input costs that require an outlay of money by the firm

MC=

change in total cost/change in quantity

At very low levels of output average total cost is high because_________________________________________

fixed cost is spread over only a few unit

Costs of production may be divided into _________________ and _____________________.

fixed costs and variable costs

In the long run, ___________________________________

fixed costs become variable costs.

Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job, are ___________.

implicit

implicit costs

input costs that do not require an outlay of money by the firm