Textbook Notes (362,899)
Canada (158,093)
Economics (727)
ECON 1B03 (302)
Chapter 13

Chapter 13

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McMaster University
Usman Hannan

CHAPTER 13: THE COSTS OF PRODUCTION - industrial organization: the study of how firms’ decisions regarding prices and quantities depend on the market conditions they face What Are Costs 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 – total cost (want to maximize profit as this is the money going into your pocket) Costs as Opportunity Costs - explicit costs: input costs that require an outlay of money by the firm (i.e. hiring workers, buying parts) - implicit costs: input costs that do not require an outlay of money by the firm (opportunity costs, the costs of our life) - implicit costs are often ignored or forgotten The Cost of Capital as an Opportunity Cost - important implicit cost is the opportunity cost of the financial capital that has been invested in the business (i.e. what would you be making if it were accumulating interest?) Economic Profit vs. Accounting Profit - accountants and economist measure costs and profit differently - economic profit: total revenue minus total cost (including both implicit and explicit costs) - accounting profit: total revenue minus total explicit cost - accounting profit is usually higher than economic profit due to their blind eye on implicit costs Production and Costs The Production Function - production function: the relationship between quantities of inputs used to make a good and the quantity of output of that good - focus on short run - marginal product: the increase in output that arises from an additional unit of input = total cost/Q - diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases - marginal product of labor (MPL) = change in quantity output/change in labor From the Production Function to the Total-Cost Curve - total-cost curve graphs quantity produced vs. total cost - when the quantity produced is large, the total-cost curve is relatively steep The Various Measures of Cost Fixed and Variable Costs - fixed costs: costs that do not vary with the quantity of output produced (i.e. rent) - variable costs: costs that do vary with the quantity of output produced (i.e. lemon
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