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Unformatted text preview: Chapter 7: The Costs of Production CHAPTER 7 THE COST OF PRODUCTION TEACHING NOTES The key topics in this chapter are • accounting versus economic costs of production, • definitions of total, average, and marginal cost in the short run and long run, • a graphical representation of total, average, and marginal cost, and • cost minimization, graphically in the chapter, and mathematically in the appendix. It is important to distinguish between accounting and economic costs so that students will understand that zero (economic) profit is a feasible long run equilibrium. It is important to spend time on the cost curve definitions and graph because they form the foundation for what will be covered in chapter 8 (firm supply). The cost minimization problem is useful for explaining which inputs the firm should use to produce a given quantity of output, and this discussion draws on the discussion of isoquants from chapter 6. It is also possible at this point to discuss the basic concept of hiring inputs until the wage is equal to the marginal revenue product of the input (chapter 14). The chapter also contains three sections that can be covered as special topics (production with two outputs, dynamic changes in costs, and estimating cost), or can be skipped altogether. Opportunity cost forms the conceptual base of this chapter. While most students think of costs in accounting terms, they must develop an understanding of the distinction between accounting, economic, and opportunity costs. One source of confusion is the opportunity cost of capital, i.e., why the rental rate on capital must be considered explicitly by economists. It is important, for example, to distinguish between the purchase price of capital equipment and the opportunity cost of using the equipment. The opportunity cost of a person’s time also leads to some confusion for students. Following the discussion of opportunity cost, the chapter diverges in two directions: one path introduces types of cost and cost curves, and the other focuses on cost minimization. Both directions converge with the discussion of long-run average cost. While the definitions of total cost, fixed cost, average cost, and marginal cost and the graphical relationships between them can seem tedious and/or uninteresting to the student, both are important in terms of understanding the derivation of the firm’s supply curve in chapter 8. Doing algebraic or numerical examples in table form is helpful for some students in terms of seeing the relationships between the different costs. Explain that each firm has a unique set of cost curves based on its own between the different costs....
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This note was uploaded on 06/06/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.
- Spring '09