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Ch13 Cost of Production

Firms try to maximize their profit, which is the total revenue minus the total cost. Their are two types of costs: explicit and implicit. Economists consider the implicit costs, which is the opportunity costs.

A typical firm's production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product.

A firm's total cost can be divided between fixed costs and variable costs. Fixed costs do not change when more outputs are produced, while variable costs do. When analyzing firm behavior, it is useful to graph average total cost and marginal cost. The marginal cost curve always crosses the average total cost cure 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.

chapter 13 key concepts 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 profit: Firm’s total revenue minus its total cost explicit costs: costs that require the firm to pay out some money implicit costs: costs that does not require the firm to make a cash outlay economic profit: total revenue minus total cost, which includes both explicit and implicit costs accounting profit: total revenue minus total explicit cost production function: The relationship between the quantity of inputs and the quantity of outputs marginal product: increase in the quantity of output obtained from one additional unit of that input diminishing marginal product: The property whereby the marginal product of an input declines as the quantity of the input increase fixed costs: costs that do not vary with the quantity of output produced variable costs: costs that do vary with the quantity of output produced average total cost: total cost divided by the quantity of output average fixed cost: fixed costs divided by the quantity of output average variable cost: variable costs divided by the quantity of output marginal cost: the increase in total cost that arises from an extra unit of production efficient scale: The quantity of output that minimizes the average total cost 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

Sources: http://www.willamette.edu/~fthompso/ManEX/Sem119-Costs/cost4.GIF http://www.transtutors.com/economics-homework-help/managerial-economics/costs-of-production.aspx http://viewyonder.com/wp-content/uploads/2009/07/bottling-production-line.bmp

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