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Unformatted text preview: Chapter 13 The Costs of Production WHATS NEW IN THE THIRD EDITION: The connection between the shape of the total cost curve and the shape of the production function is more explicit. There is also a new In the News box on True Profit vs. Fictitious Profit. LEARNING OBJECTIVES: By the end of this chapter, students should understand: what items are included in a firms costs of production. the link between a firms production process and its total costs. the meaning of average total cost and marginal cost and how they are related. the shape of a typical firms cost curves. the relationship between short-run and long-run costs. CONTEXT AND PURPOSE: Chapter 13 is the first chapter in a five-chapter sequence dealing with firm behavior and the organization of industry. It is important that students become comfortable with the material in Chapter 13 because Chapters 14 through 17 are based on the concepts developed in Chapter 13. To be more specific, Chapter 13 develops the cost curves on which firm behavior is based. The remaining chapters in this section (Chapters 14-17) utilize these cost curves to develop the behavior of firms in a variety of different market structurescompetitive, monopolistic, oligopolistic, and monopolistically competitive. 241 THE COSTS OF PRODUCTION 13 242 Chapter 13/The Costs of Production The purpose of Chapter 13 is to address the costs of production and develop the firms cost curves. These cost curves underlie the firms supply curve. In previous chapters, we summarized the firms production decisions by starting with the supply curve. While this is suitable for answering many questions, it is now necessary to address the costs that underlie the supply curve in order to address the part of economics known as industrial organization the study of how firms decisions about prices and quantities depend on the market conditions they face. KEY POINTS: 1. The goal of firms is to maximize profit, which equals total revenue minus total cost. 2. When analyzing a firms behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job, are implicit....
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- Fall '08