In this chapter, you will learn to: Demonstrate the relationship between production and costs and the relationship between sales and revenues, explain that models of production are based on the assumption that firms seek to maximize profit, demonstrate how profit maximization dictates that firms set production so that marginal cost equals marginal revenue. | Chapter 5 Firm Production, Cost, and Revenue Chapter Outline Production Costs Revenue Profit and Profit Maximization Basic Definitions Profit: The money that business makes: Revenue minus Cost Cost: the expense that must be incurred in order to produce goods for sale Revenue : the money that comes into the firm from the sale of their goods Economic vs. Accounting Cost Economic Cost: All costs, both those that must be paid as well as those incurred in the form of forgone opportunities, of a business Accounting Cost: Only those costs that must be explicitly paid by the owner of a business Production Production Function: a graph which shows how many resources we need to produce various amounts of output Cost Function: a graph which shows how much various amounts of production cost Inputs to Production Fixed Inputs: resources that you cannot change Variable Inputs : resources that can be easily changed Concepts in Production Division of Labor: workers divide up the tasks in such a way . | Chapter 5 Firm Production, Cost, and Revenue Chapter Outline Production Costs Revenue Profit and Profit Maximization Basic Definitions Profit: The money that business makes: Revenue minus Cost Cost: the expense that must be incurred in order to produce goods for sale Revenue : the money that comes into the firm from the sale of their goods Economic vs. Accounting Cost Economic Cost: All costs, both those that must be paid as well as those incurred in the form of forgone opportunities, of a business Accounting Cost: Only those costs that must be explicitly paid by the owner of a business Production Production Function: a graph which shows how many resources we need to produce various amounts of output Cost Function: a graph which shows how much various amounts of production cost Inputs to Production Fixed Inputs: resources that you cannot change Variable Inputs : resources that can be easily changed Concepts in Production Division of Labor: workers divide up the tasks in such a way that each can build up a momentum and not have to switch jobs Diminishing Returns: the notion that there exists a point where the addition of resources increases production but does so at a decreasing rate Figure 1 The Production Function Output Workers Production Function A B C D A Numerical Example Labor Total Output Extra Output of the Group 0 0 1 100 100 2 317 217 3 500 183 4 610 110 5 700 90 6 770 70 7 830 60 8 870 40 9 900 30 13 1000 Costs Fixed Costs: costs of production that we cannot change Variable Costs: costs of production that we can change Figure 2 The Total Cost Function Output Total Cost Total Cost Function A B C D Cost Concepts Marginal Cost: the addition to cost associated with one additional unit of output Average Total Cost: Total Cost/Output, the cost per unit of production Average Variable Cost: Total Variable Cost/Output, the average variable cost per unit of production Average Fixed Cost: Total Fixed Cost/Output, the average fixed cost per unit of production Figure
