Chapter 8 - The costs of production. In this chapter, students will be able to: Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs; relate the law of diminishing returns to a firm’s short-run production costs; describe the distinctions between fixed and variable costs and among total, average, and marginal costs; use economies of scale to link a firm’s size and its average costs in the long run. | The Costs of Production Chapter 8 Chapter Objectives Explicit and implicit costs Law of diminishing returns Fixed and variable costs Total, average, and marginal costs The firm’s size in the long run 8- Economic Costs Equal to opportunity costs Explicit + implicit costs Explicit costs Monetary payments Implicit costs Value of next best use Self-owned resources Self-employed resources 8- Profit Accounting profit Total revenue less explicit cost Normal profit Equal to implicit cost Economic or pure profit Total revenue less economic cost 8- Profits Compared Economic Profit Accounting Costs (Explicit Costs Only) Accounting Profit Explicit Costs Implicit Costs (Including a Normal Profit) Economic (Opportunity) Costs Total Revenue Economic Accounting 8- Short and Long Run The short run Fixed plant capacity Variable intensity of plant use Variable output The long run Variable plant capacity Firms enter and exit 8- Production Relationships Total product (TP) Marginal product (MP) Average product (AP) Average Product Total Product Units of Labor = Marginal Product Change in Total Product Change in Labor Input = 8- Law of Diminishing Returns Fixed technology Add variable resource to fixed resource Marginal product will decline Beyond some point Rationale 8- Increasing Marginal Returns Law of Diminishing Returns (1) Units of the Variable Resource (Labor) (2) Total Product (TP) (3) Marginal Product (MP), Change in (2)/ Change in (1) (3) Average Product (AP), (2)/(1) 0 1 2 3 4 5 6 7 8 0 10 25 45 60 70 75 75 70 10 15 20 15 10 5 0 -5 - ] ] ] ] ] ] ] ] Diminishing Marginal Returns Negative Marginal Returns 8- 0 10 20 30 Total Product, TP 1 2 3 4 5 6 7 8 9 20 10 Marginal Product, MP 1 2 3 4 5 6 7 8 9 TP MP AP Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns Law of Diminishing Returns 8- Short-Run Production Costs Fixed Costs Do not vary with output Variable Costs . | The Costs of Production Chapter 8 Chapter Objectives Explicit and implicit costs Law of diminishing returns Fixed and variable costs Total, average, and marginal costs The firm’s size in the long run 8- Economic Costs Equal to opportunity costs Explicit + implicit costs Explicit costs Monetary payments Implicit costs Value of next best use Self-owned resources Self-employed resources 8- Profit Accounting profit Total revenue less explicit cost Normal profit Equal to implicit cost Economic or pure profit Total revenue less economic cost 8- Profits Compared Economic Profit Accounting Costs (Explicit Costs Only) Accounting Profit Explicit Costs Implicit Costs (Including a Normal Profit) Economic (Opportunity) Costs Total Revenue Economic Accounting 8- Short and Long Run The short run Fixed plant capacity Variable intensity of plant use Variable output The long run Variable plant capacity Firms enter and exit 8- Production Relationships Total product (TP) Marginal .
