Chapter+13-+The+Costs+of+Production

 The Costs of Production
 * Glossary:**
 * **accounting profit** || total revenue minus total explicit cost ||
 * **average fixed cost** || fixed costs divided by the quantity of output ||
 * **average total cost** || total cost divided by the quantity of output ||
 * **average variable cost** || variable costs divided by the quantity of output ||
 * **constant returns to scale** || the property whereby long-run average total cost stays the same as the quantity of output changes ||
 * **diminishing marginal product** || the property whereby the marginal product of an input declines as the quantity of the input increases ||
 * **diseconomies of scale** || the property whereby long-run average total cost rises as the quantity of output increases ||
 * **economic profit** || total revenue minus total cost, including both explicit and implicit costs ||
 * **economies of scale** || the property whereby long-run average total cost falls as the quantity of output increases ||
 * **efficient scale** || the quantity of output that minimizes average total cost ||
 * **explicit costs** || input costs that require an outlay of money by the firm ||
 * **fixed costs** || costs that do not vary with the quantity of output produced ||
 * **implicit costs** || input costs that do not require an outlay of money by the firm ||
 * **marginal cost** || the increase in total cost that arises from an extra unit of production ||
 * **marginal product** || the increase in output that arises from an additional unit of input ||
 * **production function** || the relationship between quantity of inputs used to make a good and the quantity of output of that good ||
 * **profit** || total revenue minus total cost ||
 * **total cost** || the market value of the inputs a firm uses in production ||
 * **total revenue** || the amount a firm receives for the sale of its output ||
 * **variable costs** || costs that do vary with the quantity of output produced ||

In this chapter, we will be looking for supply curve in the market more detail. The key question in this chapter is how the number of firms affect the prices and efficiency of the market. However, the costs of production is what we need to learn first. There are variables used to measure the costs and relationships of these costs.

The goal of a firm is to maximize profit, which can be defined in this equation: Price = Total Revenue - Total Cost
 * Total Revenue, Total Cost, and profit **
 * Total revenue** means the amount that the firms receive for selling the output
 * Total cost** means the total amount that the firm pays to buy the inputs

Costs as opportunity cost A firm’s cost of production includes all the opportunity costs of making its output of goods and services. When you consider the costs as **opportunity costs**, there are 2 types of costs that you must consider: Economic profit vs. accounting profit Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs. Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. The production function ** It shows the relationship between quantity of inputs used to make a good and the quantity of output of that good. The marginal product of any input in the production process is the **increase in output that arises from an additional unit of that inpu**t. Diminishing marginal product is the property whereby the **marginal product of an input declines as the quantity of the input increases.**
 * Explicit Costs
 * input costs that are easily identified and required by the firm, such as the wage expense.
 * Implicit Costs
 * input costs that are not easily accounted and not required by the firm, such as the time and effort that the owner puts into the company.[[image:Picture_24.png width="415" height="251" align="right" caption="Source: textbook"]]
 * Economic profit
 * total revenue minus total cost, including both explicit and implicit costs
 * Accounting profit
 * total revenue minus total explicit cost
 * As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.

The slope of the **production function** measures the marginal product of an input, such as a worker. In the left graph, we can conclude that when the marginal product declines, the production function becomes flatter. From the production function to the total cost curve, the relationship between the quantity a firm can produce and its costs determines pricing decisions. The total-cost curve (right) shows this relationship graphically.

Costs of production may be divided into fixed costs and variable costs.
 * The various Measures of Cost **

To find out the **cost of the typical unit produced**, we would divide the firm's costs by the quantity of output it produces To find out **how much it costs to produce an additional unit of output**, find marginal cost ** Cost Curves and Their Shapes ** Marginal cost rises with the amount of output produced The average total-cost curve is U-shaped. At very low levels of output **average total cost** is high because fixed cost is spread over only a few units. Average total cost declines as output increases. Average total cost starts rising because average variable cost rises substantially. The bottom of the U-shaped ATC curve occurs at the quantity that minimizes average total cost. This quantity is sometimes called the **efficient scale** of the firm. Relationship between Marginal Cost and Average Total Cost
 * Fixed costs
 * costs that **does not change** as the output is produced
 * Variable costs
 * costs that **does change** with the output that is being produced
 * Average total cost = Total cost divided by Quantity
 * Average fixed cost = Fixed cost divided by Quantity
 * Average variable cost = Variable cost divided by Quantity
 * Marginal cost  = Change in total cost divided by change in Quantity
 * 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.

Cost in the Short run and Long run For many firms, the division of total costs between fixed and variable costs depends on the time horizon being considered. Because many costs are fixed in the short run but variable in the long run, a firm’s long-run cost curves differ from its short-run cost curves.
 * In the short run, some costs are fixed.
 * In the long run, fixed costs become variable costs.

For the long-run ATC, you must consider the following three terms: For the first one, economies of scale refers to the **falling of long-run ATC** as the quantity increases. Second one refers to the **rising of long-run ATC** as Q increases, and the last one refers to the **constant long-run ATC** even as Q changes.
 * ** Economies of scale **
 * 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 increases

Conclusion We have learned about tools that we can use to see the process of production and its pricing decisions. Therefore, now, we should be able to fully understand the costs and how they vary with the output quantity.