Chapter 13: The Costs of Production 1. Costs a. Total Revenue – the amount a firm receives for the sale of its output b. Total Cost – the market value of the inputs a firm uses in production c. Profit – total revenue minus total cost i. Profit = Total revenue – Total cost d. Costs as Opportunity Costs i. Explicit Costs – input costs that require an outlay of money by the firm ii. Implicit ( Opportunity ) Costs – input costs that do not require an outlay of money by the firm iii. The total cost is the sum of the explicit and implicit costs e. The Cost of Capital as an Opportunity Cost i. An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business ii. The money could have been deposited in a savings account that pays interest f. Economic Profit vs. Accounting Profit i. Economic Profit – total revenue minus total cost, including both explicit and implicit costs ii. Accounting Profit – total revenue minus total explicit cost iii. Accounting profit is usually larger than economic profit iv. For a business to be profitable from an economist’s standpoint, total revenue must cover all the opportunity costs (explicit + implicit) 2. Production and Costs a. The Production Function i. Production Function – the relationship between quantity of inputs used to make a good and the quantity of output of that good ii. Marginal Product – the increase in output that arises from an additional unit of input 1. When the number of workers goes from 1 to 2, cookie production increase from
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- Fall '11
- Economics, average total cost