Chap022 - The Costs of Production CHAPTER TWENTY-TWO THE...

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The Costs of Production CHAPTER TWENTY-TWO 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 both the total-, unit-, and marginal-cost concepts. These concepts prepare students for both total-revenue—total-cost and marginal-revenue — 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. WHAT’S NEW The chapter content remains largely intact, though some of the old examples have been replaced and others have been updated. The “Applications and Illustrations” have been moved to later in the chapter, after the discussion of minimum efficient scale. A “Consider This” box on diminishing returns has been added. It appeared in the previous edition’s website “Analogies, Anecdotes, and Insights” section. 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. 44
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The Costs of Production 13. Explain the difference between short-run and long-run costs. 14. State why the long-run average cost curve is expected to be U-shaped. 15. List causes of economies and diseconomies of scale.
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This note was uploaded on 05/04/2011 for the course ECON 102 taught by Professor Gini during the Spring '11 term at Salt Lake Community College.

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Chap022 - The Costs of Production CHAPTER TWENTY-TWO THE...

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