Step+13.+The+Costs+of+Production-+Lauren

=**CHAPTER 13 - THE COSTS OF PRODUCTION** =



=__**KEY TERMS**__ = total revenue total cost profit explicit costs implicit costs economic profit accounting profit production function marginal product diminishing marginal product fixed costs variable costs average total cost average fixed cost average variable cost marginal cost efficient scale economies of scale diseconomies of scale constant returns to scale

= = = **__ WHAT WE WILL LEARN __**= = =
 * what is the goal of firms, and how do they reach this goal?
 * what are some of the opportunity costs in a firm? What is the difference between implicit and explicit costs?
 * What is the typical pattern of a typical firm's production? (in relation to total-cost curve, marginal product, quantity, etc..)
 * What are variable costs and fixed costs? What's the difference?
 * What is the average total cost? Marginal cost?
 * What does firm's costs depend? Compare the effects of firm's level of production on average total cost in short run and long run

= __**INTRODUCTION**__ =

Here is where economics gets difficult... As you can see from the number of key terms we have to learn, there is A LOT to cover in this chapter... This chapter is crucial to understand firm behavior... Did you ever wonder how the number of firms affect the prices and efficiency of market? Or did you ever wonder what are some of the opportunity costs to keep a firm going? How do they make profit? What are some of their losses or costs? Well, here comes the answers to all these questions.. GOOD LUCK!

= = = __**TOPICS**__ =


 * //TOTAL REVENUE, TOTAL COST, AND PROFIT//**

- 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 minus total cost Profit = Total revenue - total cost

- Firm's cost include all opportunity costs of making its output - Opportunity costs - refers to all those things that must be forgone to acquire the item
 * //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

Total cost = explicit cost + implicit cost

//**ECONOMIC PROFIT VERSUS ACCOUNTING PROFIT**// - economic profit - total revenue minus total cost, including both explicit and implicit costs - accounting profit - total revenue minus total explicit cost - Firm making positive economic profit will stay in business; if there is economic loss, the firms will close the business down and exit the industry


 * //PRODUCTIONS AND COSTS//**

- production function - the relationship between quantity of inputs used to make a good and the quantity of output of that good BASICALLY, THE RELATIONSHIP BETWEEN THE INPUT AND THE OUTPUT - 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

Example, the production function gets flatter as the number of workers increases, which reflects DIMINISHING MARGINAL PRODUCT. In another words, as the number of workers increases, the quantity of output also increases, but by less and less amount (because more workers mean eventually more crowded condition). And diminishing marginal product essentially equals to increase in total cost.

- fixed costs (FC)- costs that do not vary with the quantity of output produced - variable costs (VC) - costs that do vary with the quantity of output produced - REMEMBER THAT TOTAL COST = FIXED COST + VARIABLE COST This is a little different from the difference between implicit and explicit cost. TOTAL OPPORTUNITY COST = IMPLICIT AND EXPLICIT
 * //FIXED AND VARIABLE COSTS//**


 * //AVERAGE AND MARGINAL COST//**

- To find the cost of the typical unit produced, we would divide the firm's costs by the quantity of output it produces. This gives you the AVERAGE TOTAL COST (ATC) - Average fixed cost (AFC) is the fixed cost divided by the quantity of output, and the average variable cost (AVC) is the variable cost divided by the quantity of output.

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

Let's look at the relationship between MC, AFC, AVC, and ATC in a typical firm.

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 * //COST IN THE SHORT RUN AND IN THE LONG RUN//**

In the long run, fixed costs become variable costs... (In the long run, firms can build new factories or even close firms temporarily.) And the ATC curve in the short run differs from the long run.


 * //ECONOMIES AND DISECONOMIES OF SCALE//**

- 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 - Costant returns to scale - the property whereby long-run average total cost stays the same as the quantity of output changes - Increasing specialization and high levels of production -> economies of scale - coordination prolem --> diseconomies of scale

= = =**__ CONCLUSION __**= = = Now than you know all about AVC, ATC, MC, AFC, TC, FC, VC, you'll be able to see how these apply in specfic markets like monopolies, oligopolies, monopolistic competitive markets, etc in the following chapters

= __**QUIZ**__ =

Fill in the chart


 * Term || Definition || Mathematical Description ||
 * explicit costs ||  || --- ||
 * || costs that do not require an outlay of money by the firm || --- ||
 * Fixed costs ||  || FC ||
 * || costs that do vary with the quantity of output produced ||  ||
 * Total costs ||  ||   ||
 * Average fixed cost ||  || AFC = FC/Q ||
 * ||  || AVC = VC/Q ||
 * || Total cost divided by the quantity fo output ||  ||
 * || the increase in total cost that arises from an extra unit of production ||  ||

= __**SOURCES**__ = = =  http://willpowermoulding.com.hk/images/factory_inside03.jpg