Microeconomics Chapter 13: The Costs of Production

States that firms are willing to produce and sell at greater quantities of a good or service when the price of a good increases, causing an upward sloping supply curve

The study of how firms' decisions about price and quantity depends on the market conditions they face; firms make decisions to make money and maximize profit

Q x P
Amount a firm receives for sales of its output

The market value of the inputs a firm uses in production (includes opportunity costs)

total revenue - total cost

Input costs that require an outlay of money by the firm

Input costs that do not require an outlay of money by the firm; opportunity costs

There are important implicit costs to almost every business (the foregone next best thing)

Total revenue - total cost (including both implicit and explicit costs)

Total revenue - total explicit cost

Accounting profit is almost always greater than economic profit. Something is economically profitable ONLY IF revenue is greater than total costs. Economic profit is the motivator for firms to supply goods and services, but firms incur costs when they buy inputs to produce the goods and services they plan to sell

In analysis, we generally make the assumption that a factory is fixed and quantity of a good or service supplied only changes when changing the numbers of employees; this is only realistic in the short run

the relationship between quantity of inputs used to make a good and the quantity of output of that good (quantity of output vs. number of workers hired). The slope of the production function measures the marginal product of a worker.

The increase in output that arises from an additional one unit of input; a total cost curve. When the quantity produced is large, the total cost curve is relatively steep. In reality, the marginal product does not fall immediately after the first worker is hired, and more people might increase efficiency with higher marginal product.

Property whereby the marginal product of an input declines as the quantity of the input increases (as number of workers increases, the marginal product decreases). Not necessarily because the additional units are inherently worse and less efficient; mostly due to coordination

To determine relationships between quantity produced and total costs

The two curves are opposite of each other because of diminishing marginal product.

Costs that do not vary with the quantity of output produced, incurred even if the firm produces absolutely nothing

costs that vary with the quantity of output produced

fixed costs + variable costs

Total cost / quantity of output
Assumes total cost is divided evenly over all the units produced; finds cost of the typical unit produced; total cost is the sum of averaged fixed and average variable cost

Fixed cost / quantity of output

variable cost / quantity of output

Change in total cost / change in quantity
Finds increase in total cost that arises from an additional extra unit of production
Remember that rational people think at the margin

Horizontal/x-axis is quantity produced
Vertical/y-axis is cost

Reflects the property of diminishing marginal product; if a lower quantity is produced, marginal product of an extra worker is large and marginal cost to produce goods/services is small. If a higher quantity is produced, marginal product of an extra worker is low and marginal cost of production is high. Initially may decline a little because of specialization.

Reflects the shape of both the average fixed cost and average variable cost curves. The AFC curve declines as output rises because the cost is spread out over an increasing number of units. The AVC curve rises as output increases because of diminishing marginal product.
At low quantity of output, ATC is greater than AVC. As the quantity of output increases, the AVC increases.

The quantity of output that minimizes average total cost (point at which AVC and AFC are balanced)

At low quantities: marginal cost is less than ATC and ATC is falling
At high quantities: marginal cost greater ATC and ATC is rising
The marginal cost curve crosses the average total cost curve at its MINIMUM.

1. Marginal cost eventually rises with quantity of output
2. Average total cost curve is U-shaped
3. Marginal cost curve crosses the average total cost curve at its minimum

Short run time horizons: costs are fixed
Long term time horizons: costs are variable
The short term ATC curves lie on or above the ATC curve, because firms have greater flexibility in the long run. In the long run, a firm gets to decide what short term curve it wants to use. In the short run, a firm must choose what they have chosen in the past.

the property whereby long-run average total cost stays the same as the quantity of output changes

the property whereby long-run average total cost falls as the quantity of output increases

the property whereby long-run average total cost rises as the quantity of output increases

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