In this chapter you will: Examine what items are included in a firm’s costs of production, analyze the link between a firm’s production process and its total costs, learn the meaning of average total cost and marginal cost and how they are related, consider the shape of a typical firm’s cost curves, examine the relationship between short-run and long-run costs. | The Costs of Production Chapter 13 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. The Firm’s Objective Maximum Profits The economic goal of the firm is to maximize profits. A Firm’s Profit Profit is the firm’s total revenue minus its total cost. Profit = Total revenue - Total cost Total Cost includes all of the opportunity costs of production Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue What happens to profit though as you keep on adding workers? Additional input Additional output = Marginal product Diminishing Marginal Product Diminishing marginal product is the property whereby the marginal product of an input . | The Costs of Production Chapter 13 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. The Firm’s Objective Maximum Profits The economic goal of the firm is to maximize profits. A Firm’s Profit Profit is the firm’s total revenue minus its total cost. Profit = Total revenue - Total cost Total Cost includes all of the opportunity costs of production Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue What happens to profit though as you keep on adding workers? Additional input Additional output = Marginal product Diminishing Marginal Product Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment. Your Journal Question You have just been given 10 acres of land. The land is of varying quality. The amount of land remains fixed. What will happen to your yield as you keep on adding workers? Can you write down an example of diminishing returns from your experience? A Production Function. Quantity of Output (cookies per hour) 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 Number of Workers Hired 0 1 2 3 4 5 Production function Fixed and Variable Costs Fixed costs are those costs that do not vary with the quantity of output produced. Variable costs are those costs that do change as the firm alters the quantity of output produced. Short Run vs. Long Run Costs Family of Total Costs Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC) TC = TFC + TVC .
