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Chapter 13

# ECON 1000 Chapter Notes - Chapter 13: Average Cost, Average Variable Cost, Marginal Cost

Department
Economics
Course Code
ECON 1000
Professor
Troy Joseph
Chapter
13

This preview shows page 1. to view the full 5 pages of the document. ECON 1000
CHAPTER 12: THE COSTS OF PRODUCTION
Total revenue, total cost, and profit
Economists normally assume that the goal of a firm is to maximize profit, and they find that this
assumptions works well in most cases.
What is a fir’s profit? The aout that the fir reeies for the sale of its output ookies is
called its total revenue. That amount that the firm pays to buy input is called its total cost.
Profit is a fir’s total reeue ius its total ost.
Costs as opportunity costs
Opportunity costs refers to all those things that must be forgone to acquire that item.
Costs can be cost to buy materials, which is money that can no longer be used to purchase
other things or invest elsewhere. When the opportunity costs require the firm to pay out some
oe, the are alled epliit osts aterials, ages, et.. B otrast, soe of a fir’s
opportunity costs, called implicit costs, do not require a cash outlay. For example, if you open a
shop, but you could be making 100\$ an hour elsewhere, then that would be considered implicit
cost.
Economists use both explicit and implicit costs when measuring total cost. By contrast,
accountants have the job of keeping track of the money that flows into and out of firms.
The cost of capital as an opportunity cost
An important implicit cost of almost every business is the opportunity cost of the financial
capital that has been invested in the business. Suppose that Carol used 300K of her savings to
buy her cookie factory. If she had left it in a savings account that pays an interest of 5%, she
would have earned 15K per year. To own her cookie factory, therefore, Carol has given up 15K a
year in interest income.
Economic profit versus accounting profit
An economist measures a fir’s eooi profit as the fir’s total reeue iue all the
opportunity costs (explicit and implicit) of producing the goods and services sold. An
aoutat easures the fir’s aoutig profit as the fir’s total reeue ius ol the
fir’s eplicit costs. Therefore, accounting profit is usually larger than economic profit.
Economic profit is an important concept because it is what motivates the firms that supply
goods and services.
Production and costs
Firms incur costs when they buy inputs to produce the goods and services they plan to sell.
The production function
The quantity of cookies depends on the number of workers. This is what makes up the
production function (number of workers vs number of cookies)
A total cost curve shows the relationship between the quantity of output produced and total
cost of production.
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. When the number of workers goes from
1 to 2, cookie production increases from 50 to 90, so the marginal product of the second
As it goes on, we see that the marginal product declines. This is called diminishing marginal
product. At first, when only a few are hired, the hae eas aess to Carol’s kithe
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Only page 1 are available for preview. Some parts have been intentionally blurred. equipment. As the number of workers increases, additional workers have to share equipment
and work in more crowded conditions.
From the production function to the total-cost curve
The total cost curve gets steeper as the amount produced rises, whereas the production
function gets flatter as production rises.
When the quantity produced is large, the total-cost curve is relatively steep.
The various measures of cost
Fixed and variable costs
Fixed costs do not vary with the quantity of output produced. They are incurred even if the firm
produces nothing at all (rent).
Variable costs change as the firm alters the quantity of output produced (coffee beans, cups,
milk, sugar).
Average and marginal costs
Total costs divided by the quantity of output is called average total cost. Because total cost is
just the sum of fixed and variable costs, average total cost can be expressed as the sum of the
average fixed cost and average variable cost. Average fixed cost is the fixed cost divided by the
quantity of output and average variable cost is the variable cost divided by the quantity of
output.
Marginal cost is the amount that total cost rises when the firm increases production by 1 unit of
output.
Average total cost= total cost / quantity
ATC= TC/Q
Marginal cost = change in total cost/ change in quantity
MC= ∆TC / ∆Q
Cost curves and their shapes
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