This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Chapter 08 - The Costs of Production CHAPTER EIGHT THE COSTS OF PRODUCTION CHAPTER OVERVIEW This chapter develops a number of crucial cost concepts that will be employed in the succeeding three chapters to analyze the four basic market models. A firm’s implicit and explicit costs are explained for both short- and long-run periods. The explanation of short-run costs includes arithmetic and graphic analyses of the total-, average-, and marginal-cost concepts. These concepts prepare students for both total-revenue—total-cost and marginal-revenue — and marginal-cost approaches to profit maximization, which are presented in the next few chapters. The law of diminishing returns is explained as an essential concept for understanding average and marginal cost curves. The general shape of each cost curve and the relationship they bear to one another are analyzed with special care. The final part of the chapter develops the long-run average cost curve and analyzes the character and factors involved in economies and diseconomies of scale. The role of technology as a determinant of the structure of the industry is presented through several specific illustrations. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Distinguish between explicit and implicit costs, and between normal and economic profits. 2. Explain why normal profit is an economic cost, but economic profit is not. 3. Explain the law of diminishing returns. 4. Differentiate between the short run and the long run. 5. Compute marginal and average product when given total product data. 6. Explain the relationship between total, marginal, and average product. 7. Distinguish between fixed, variable and total costs. 8. Explain the difference between average and marginal costs. 9. Compute and graph AFC, AVC, ATC, and marginal cost when given total cost data. 10. Explain how AVC, ATC, and marginal cost relate to one another. 11. Relate average product to average variable cost, and marginal product to marginal cost. 12. Explain what can cause cost curves to rise or fall. 13. Explain the difference between short-run and long-run costs. 14. State why the long-run average cost is expected to be U-shaped. 15. List causes of economies and diseconomies of scale. 16. Indicate relationship between economies of scale and number of firms in an industry. 17. Define and identify terms and concepts listed at the end of the chapter. 8-1 Chapter 08 - The Costs of Production LECTURE NOTES I. Learning objectives – In this chapter students will learn: A. Why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs. B. How the law of diminishing returns relates to a firm’s short-run production costs....
View Full Document
- Spring '09
- Economics of production