Chapter 19 - CHAPTER 21 Production and Costs Having taken a look at the nature of the firm the rationale for producing cooperatively the various

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CHAPTER 21 Production and Costs Having taken a look at the nature of the firm, the rationale for producing cooperatively, the various types of business organizations, and (briefly) some of the financial concerns of business firms, we now turn to the mechanics of supply. The decision of how much to produce and at what price to sell it are functions of three variables: costs, revenues, and market structure . Chapters 22–24 will discuss market structure and the revenue conditions facing firms under each of the different market structures. This chapter looks at costs. All production involves costs. In fact, all economic activity (as we discussed in the introductory chapters of this text) involves costs. Chapter 21 looks at a variety of important cost concepts and relates them to the decisions of the producing firm in both the short run and the long run. In the process, the student is introduced to total cost, average cost, marginal cost, fixed cost, variable cost , and the various combinations of these concepts that are vital to cost analysis, as well as economies (and diseconomies) of scale . CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Distinguish between explicit and implicit costs. 2. Distinguish between accounting and economic profit. 3. Explain why earning zero economic profit is not that bad. 4. Explain why it is better to ignore sunk cost than to make decisions based on it. 5. Identify numerous cost concepts and cost curves. 6. Tie production to costs. 7. Explain why higher costs don’t always mean higher prices. KEY TERMS profit • variable costs explicit cost • total cost (TC) implicit cost • marginal cost accounting profit • average-fixed cost (AFC) economic profit • average variable cost (AVC) normal profit • average total cost or unit cost (ATC) fixed input • average-marginal rule variable input • sunk cost 203
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204 Chapter 21 short run long-run average total cost curve (LRATC) long run economics of scale marginal physical product • constant returns to scale law of diminishing marginal returns • diseconomies of scale fixed costs • minimum efficient scale CHAPTER OUTLINE I.THE FIRM’S OBJECTIVE: MAXIMIZING PROFIT A.Explicit and Implicit Costs —All economic decisions entail opportunity costs —something given up when one action is taken rather than another. Those costs may be either explicit or implicit . 1.Explicit Costs —costs incurred when an actual monetary payment is made . For instance, the explicit cost of a gallon of milk is $1.89. 2.Implicit Costs —represent the value of resources used in the production or acquisition of a good for which no monetary payment is made . For example, the implicit cost to the dairy farmer is the money he could have earned had he chosen another pursuit. B.Accounting Profit and Economic Profit
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This note was uploaded on 09/22/2009 for the course BUSINESS Economics taught by Professor Richard during the Fall '08 term at Florida State College.

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Chapter 19 - CHAPTER 21 Production and Costs Having taken a look at the nature of the firm the rationale for producing cooperatively the various

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