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Chapter 13 - Costs of Production.docx

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McMaster University
Hannah Holmes

Chapter 13 - The Costs of Production Feb 9, 11 Total revenue is the amount a firm receives for the sale of its output. The total cost is the market value of the inputs a firm uses in production. Profit (capital Pi) is the firm’s total revenue minus its total cost. Cost of production includes all the opportunity costs of making its output of goods and services. Explicit Costs and Implicit Costs Explicit - Input costs that require a direct outlay of money by the firm. Implicit - Input costs that do not require an outlay of money, but refers to opportunity costs. Economists and Accountants Economists - Measure a firm’s economic profit as total revenue minus total cost, both implicit and explicit Accountants - Measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs When total revenue > both implicit and explicit costs, the firm earns economic profit. Economic profit is smaller than accounting profit because it includes implicit costs. The Production Function - Shows the relationship between quantity of inputs used to make a good and the quantity output of that good. Example: Jerry’s TV Inc. - Jerry’s TV assembles plasma TVs. The only input to production is labour. - Jerry’s production function - Output increases as Jerry adds workers, but after the 20 worker, it does so at a decreasing rate. - Each additional group of workers adds to total output, but each one adds less than the previous group. - When too many workers are hired, adding a group of workers actually takes away from total output. Marginal Product: - The increase in output that arises from an additional unit of input. - - The rate of change in total product from a small change in inputs/slope of total product function. Example: Jerry’s Marginal Product Diminishing Marginal Product - The property whereby the marginal pr
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