Choz

The Costs of

Production

Chapter 13

Copyright © 2001 by Harcourt, Inc.

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The Costs of Production

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.

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The Firm’s Objective

The economic goal of the firm

is to maximize profits.

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A Firm’s Total Revenue and

Total Cost

Total

Revenue

 The

amount that the firm receives for

the sale of its output.

Total

Cost

 The

amount that the firm pays to buy

inputs.

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A Firm’s Profit

Profit is the firm’s total revenue minus

its total cost.

Profit = Total revenue - Total cost

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Costs as Opportunity Costs

A firm’s cost of production

includes all the opportunity

costs of making its output of

goods and services.

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Explicit and Implicit Costs

A firm’s cost of production include

explicit costs and implicit costs.

Explicit

costs involve a direct money

outlay for factors of production.

Implicit costs do not involve a direct

money outlay.

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Economic Profit versus

Accounting Profit

 Economists

measure a firm’s economic

profit as total revenue minus all the

opportunity costs (explicit and implicit).

 Accountants measure the accounting

profit as the firm’s total revenue minus

only...