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Category: Business and Industry
Date Submitted: 09/25/2011 05:07 AM
Chapter
13
The Costs of Production
What are Costs?
• Total revenue
– Amount a firm receives for the sale of its output
• Total cost
– Market value of the inputs a firm uses in production
• Profit
– Total revenue minus total cost
2
What are Costs?
• Costs as opportunity costs
– The cost of something is what you give up to get it
• Firm’s cost of production
– Include all the opportunity costs
• Making its output of goods and services
3
What are Costs?
• Costs as opportunity costs • Explicit costs
– Input costs that require an outlay of money by the firm
• Implicit costs
– Input costs that do not require an outlay of money by the firm
4
What are Costs?
• The cost of capital as an opportunity cost
– Implicit cost – Interest income not earned
• On financial capital
– Owned as saving – Invested in business
• Not shown as cost by an accountant
5
What are Costs?
• Economic profit
– Total revenue minus total cost
• Including both explicit and implicit costs
• Accounting profit
– Total revenue minus total explicit cost
6
Figure 1 Economists versus accountants
Economists include all opportunity costs when analyzing a firm, whereas accountants measure only explicit costs. Therefore, economic profit is smaller than accounting profit
7
Production and Costs
• Production function
– Relationship between
• Quantity of inputs used to make a good • And the quantity of output of that good
– Gets flatter as production rises
• Rational people think at the margin • Marginal product
– Increase in output
• Arising from an additional unit of input
8
Production and Costs
• Diminishing marginal product
– Marginal product of an input declines as the quantity of the input increases
• Total-cost curve
– Relationship between quantity produced and total costs – Gets steeper as the amount produced rises
9
Table
1
A production function and total cost: Caroline’s cookie factory...