Chapter 13: Costs of

Production

The Supply and Demand

In Economy, Supply and Demand Basically runs all market activity.

Supply and Demand is the most basic and the most important prefecture of Economy

Law of Supply

In the Law of Supply implies that a firm is willing to produce quantity of good, if the price is high enough

Causing Supply curve to go upwards.

Revenue, Cost, and Profit

Firms always try to maximize their revenue, and profit.

Total Revenue: The amount received after selling the product.

Total Cost: How much it costs to create a single item.

Total Revenue – Total Cost = Profit

Firm’s Profits

In the Firm’s Cost, there exists the Explicit Cost, and the Implicit Cost

Explicit Cost: Direct outlay of money Implicit Cost: Cost not exactly requiring

tangible money

Economic Profit vs. Accounting Profit

Economist view profit with total revenue minus Explicit cost Minus Implicit Cost.

Accountants view profit with total revenue minus only the Explicit Cost

Therefore making the Economic Profit less than Accounting Profit

The Production

In production, there are Key Terms to be realized.

Such as Marginal Product: any increase in the input process, for additional units

Diminishing Marginal Product: Rule which says, Marginal quantity decreases as Q of input increases

Costs of Production

Fixed Costs: Costs that do not change with the amount of input or output used.

Variable Cost: Costs that change with the amount of item a firm produces.

Total Cost: Total Cost = Total Fixed Cost + Total Variable

Cost

Cost of Production

Average Cost: Average cost is determined by the amount cost divided by the amount produced.

Average Total Cost = Average Fixed Cost + Average Variable Cost

Marginal Cost

MC equals Amount of Cost, by the Amount of quantity

ATC

ATC is U Shaped if graphed ATC declines as output increases ATC starts rising because variable cost rises

ATC

At the Bottom of the ATC curve may result in minimizing ATC, which becomes the

EFFICIENT SCALE OF ECONOMY

MC and ATC

Whenever MC is less than ATC, ATC is falling Whenever MC is greater than ATC, the ATC

is rising.

Econmy and Diseconomist

Diseconomy of Scale: refer to the property whereby long-run average total cost rises as the quantity of output increases.

Constant Returns of Scale: The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.