Chapter 13: The Costs of Production

Chapter 11 talks about the costs of production and the profit gained from it. Total revenue is decided from the total money a firm takes in, and when the total cost (cost of inputs of production) is subtracted from it, you get the profit. There are two kinds of profit however, depending on who is doing the analyzing. An economic profit is the total revenue minus total cost (implicit and explicit) while the accounting profit only takes into account the explicit costs.

Production costs can be determined through production function (the main idea surrounding it) which is the relationship between quantity of inputs used to make a good and the output from the inputs. There are two kinds of marginal products; regular and diminishing. A marginal product is the increase in output that comes from added input, and diminishing marginal products are the opposite.

Cost are measured in different ways as well. There are fixed costs which do not change with the amount of quantity produced (rent). On the other hand, there are variable costs that change with output (inputs such as sugar or bananas). There are three equations in relation with the two ideas mentioned above. The average total cost is the total cost divided by output, average fixed cost is fixed cost divided by output, and average variable cost is the variable cost divided by the output. These help firms determine how much of each good to buy to manufacture the goods they are producing. Whenever average total cost is greater than the marginal cost, the average total cost is falling, and the marginal cost curve crosses the average total cost curve at its minimum. Costs end up being fixed in the short run but become more variable in the long run, causing the firm to change its production. Therefore, since the cost may increase in the long run, the average total cost could decrease in the long run.