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# ECON 101

## Chapter 13 The Cost of Production

Examples of a town of Lots of pizza shop but have one cable TV
company
What are the Costs?
Buying material to make a product, including the machinery,
place and cost of selling material
Total Revenue, Total Cost and Profit:
Total Revenue: Amount received after the exchange for the sale
of firms product
Total Cost: Market value of the effort a firm puts in production
Profit: TR TC
Opportunity Costs
Cost given up in order to gain something and forgone
Firms cost of production includes all opportunity costs of making
its output of goods and services
Explicit Costs: Input costs that require an outlay of money by
the firm
Implicit Costs: Input costs that dont require an outlay of
money by firm
The Cost of Capital as an Opportunity Cost
The Implicit cost of business is the opportunity cost of
o Example
Using personal saving to buy a factory
But the money from personal saving earns interest
left in the bank
The forgone interest = implicit opportunity cost of
Financial capital
Economic Profit VS Accounting Profit
Economist Measure: Firms Total Revenue All the Opportunity
Cost of producing good and services sold
Accounting Profit: Firms Total Revenue Only Explicit Costs

## Production and Costs

Production Functions
o The relationship between the quantity of input used to
make the goods and quantity of output of goods

## Marginal Product: increase in output that arise from additional

unit of input
Diminishing Marginal Product: property where the marginal
product of an input declines as the quantity of the input
increases

## The Various Measure of Cost from Firms Total Cost

Fixed Cost: Cost that do not vary with quantity of output
produced
Variable Cost: Cost that do vary with the Quantity of output
produced

## Average and Marginal costs

Average Total Costs (ATC) = Total Cost / Quantity of Output
Average Fixed Costs (AFC) = Fixed Costs / Quantity of Output
Average Variable Costs (AVC) = Variable Costs/ Quantity of
Output
Marginal Cost (MC) = Increase in total cost came when extra unit
was produced
o ATC = TC/ Q
o MC= Difference TC/ Difference Quantity
Cost Curves and Their Shapes
Rising Marginal Cost
o Marginal Cost rise with quantity of output produced
resulting in diminishing marginal product
U Shaped Average Total Cost
o Average total cost is the sum of fixed costs and average
variable cost
o Average Fixed cost always declines as output rise
Fixed cost is expanded over large number of units
o Average Variable Cost always rises
Output increases because of diminishing marginal
product
Efficient Scale: Quantity of output which minimize average total
cost
Relationship between Marginal Cost and Average total cost
When Marginal cost is less than average total cost = fall of
Average total cost

## When Marginal cost if high than average total cost= Rise in

Average total cost

## Typical Cost Curves

Have three properties which are very important
1. Marginal cost eventually rise with quantity of output
2. Average total cost curve is U shaped
3. Marginal cost curve crosses average total cost and
minimum of average total cost
Costs in the SHORT RUN and In the LONG RUN and their relationship

## Division of total cost between fixed and variable depends on the

time horizon
Fixed cost decisions are short run and variable cost are long run

## Economies and Diseconomies of Scale

Economies of scale
o Long run average total cost falls as the quantity output
rises
Diseconomies of Scale
o Long run average total cost rise as the quantity output
rises