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Chapter 13

Chapter 13 - The Costs of Production

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Course Code
Economics 10a
Gregory Mankiw

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Part V: Firm Behavior and the Organization of Industry Chapter 13: The Costs of Production  What Are Costs? ­ industrial organization: the study of how firms’ decisions about prices and  quantities depend on the market conditions they face ­ economists assume that a goal of a firm is to maximize profit ­ total revenue: amount that firm receives for the sale of its output ­ total cost: amount that firm pays to buy inputs ­ profit: total revenue – total cost ­ explicit costs: input costs that require an outlay of money by the firm (ex: supply  and labor costs) ­ implicit costs: input costs that do not require an outlay of money by the firm (ex:  costs of opportunities that are given up) ­ total cost is the sum of explicit and implicit costs ­ accountants would not include and record implicit costs ­ economic profit: total revenue minus total cost (explicit and implicit) ­ accounting profit: total revenue minus total explicit cost ­ economic profit smaller than accounting profit Production and Costs ­ production function: the relationship between quantity of inputs used to make a  good and the quantity of output of that good ­ marginal product: the increase in output that arises from an additional unit of  input ­ marginal product declines as number of workers increases ­ total­cost curve becomes more steep with additional labor  ­ fixed costs: do not vary with quantity of output produced ex: rent ­ variable costs: vary with quantity of output produced ex: labo
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