Chapter+13+The+Costs+of+Production+JBS

=Chapter 13 The Costs of Production JBS = 


 **Total revenue** : the amount a firm receives for the sale of its output


 * Total cost** : the market value of the inputs a firm uses in production


 * Profit** : total revenue - total cost


 * Explicit cost** : input cost that requires an outlay of money by the firm


 * Implicit cost** : input cost that does not require an outlay of money by the firm


 * Economic profit** : total revenue - total cost, including both explicit and implicit costs


 * Accounting profit** : total revenue - total explicit cost


 * Production function** : the relationship between quantity of inputs used to make a good and quantity of output of that good


 * Marginal product** : the increase in output that arises from an additional unit of input


 * Diminishing marginal product** : the property whereby the marginal product of an input declines as the quantity of the input increases


 * 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 (ATC**) : total cost / quantity of output


 * Average fixed cost (AFC)** : fixed cost / quantity of output


 * Average variable cost (AVC)** : variable cost/ quantity of output


 * Marginal cost (MC)** : the increase in total cost that arises from an extra unit of production


 * Efficient scale** : the quantity of output that minimized 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 coast stays the same as the quantity of output changes

 **Total Revue, Total Cost, and Profit **
 Economists normally assume that the goal of a firm is to maximize profit; a primary objective for all firms is to make money. Firm's profit is relevant to the relationship with total revenue and total cost. If you subtract the amount of total cost (the amount that the firm pays to buy inputs) from the total revenue (the amount that the firm receives for the sale of the output, then the amount of profit that the firm gets will be calculated. To sum up, //profit is a firm's total revenue minus its total cost//.

//Profit= Total Revenue= Total Cost//


 * In measuring a profit maximization, people need to fully consider how to measure total revenue and total cost.**

Firm's Cost of Production

 * includes opportunity costs of making output of goods.

// Explicit Cost vs. Implicit Cost //** ➀ Explicit**: input cost requiring the firm to pay** ➁ Implicit**: input cost not requiring the firm to pay

To get the total cost, we need to get the summation of explicit cost and implicit cost.**

//**Total cost = explicit costs + implicit costs**//

//Accountants vs. Economists//
 * 1. Accountants:** measure the explicit costs to figure out the flow of money in the firm; often ignore the implicit costs
 * 2.** **Economists**: studies how firms make production and pricing decisions based on both explicit and implicit costs

//Economic Profit vs. Accounting Profit//
 * 1. Economic Profit:** total revenue minus total cost, including both explicit and implicit costs
 * 2. Accounting Profit**: total revenue minus total explicit cost

** Production and Costs



The marginal product of any input in the production process is the 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 increases. For example, at first, when only a few workers are hired, quantity of output increases greatly because they have easy access to equipment **

**The various measures of Cost** 

1. Fixed and Variable Costs  2. Average and Marginal Cost <span style="font-family: Tahoma,Geneva,sans-serif;">Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced. Marginal cost tells us the increase in total cost that arises from producing an additional unit of output.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Fixed Cost = do not vary with Q of output produced. For example, chairs, tables, and ovens in restaurants are included in fixed cost.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Variable Cost = changes as the firm alters
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC = sum of fixed and variable costs
 * <span style="font-family: Tahoma,Geneva,sans-serif;">AFC = Fixed Cost / Q
 * <span style="font-family: Tahoma,Geneva,sans-serif;">AVC = Variable cost / Q
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC = Total cost / Quantity
 * <span style="font-family: Tahoma,Geneva,sans-serif;">MC = Change in TC / Change in Q

3. Cost Curve and Their Shapes
 * <span style="font-family: Tahoma,Geneva,sans-serif;">When the quantity of output produced is already high, the marginal product of an extra worker is low
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Efficient Scale minimizes average total cost.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Marginal cost eventually rises with the quantity of output
 * <span style="font-family: Tahoma,Geneva,sans-serif;">The average-total cost curve is U-shaped
 * <span style="font-family: Tahoma,Geneva,sans-serif;">The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost

<span style="font-family: Tahoma,Geneva,sans-serif;"> Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising.


 * The marginal-cost curve crosses the average-total-cost curve at its minimum**

Many firms experience increasing marginal product before diminishing marginal product. As a result, they have cost curves shaped.

<span style="font-family: Tahoma,Geneva,sans-serif;"> <span style="color: #000080; font-family: Tahoma,Geneva,sans-serif;">**Short Run and Long Run Average Total Cost** <span style="font-family: Tahoma,Geneva,sans-serif;">

Because fixed costs are variable in the long run, the average-total-cost curve in the short run differs from the average-total-cost curve in the long run.

Economies and Diseconomies of Scale
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Economies of Scale
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC in short run with small factors
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC in short run with medium factory
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Constant Returns to Scale:
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC in short run with medium factory
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC in short run with large factory
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Diseconomies of Scale
 * <span style="font-family: Tahoma,Geneva,sans-serif;">ATC in short run with large factory
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Long run average total cost stays the same as the quantity of output changes

<span style="color: #ff0000; font-family: Tahoma,Geneva,sans-serif;">**Bibliography** <span style="font-family: Tahoma,Geneva,sans-serif;">

http://www.bized.co.uk/glossary/big/all_costs.gif http://www.mywiseowl.com/images/en/4/4a/Total_product_curve_small.png