Chapter 13 Notes - Chapter 13 The Costs of Production...

Chapter 13: The Costs of Production
• Industrial organization  the study of how firm’s decisions about prices
and quantities depend on the market conditions they face
What are Costs?
Total Revenue, Total Cost, and Profit
• Total revenue  the amount a firm receives for the sale of its output
• Economists normally assume that the goal of a firm is to maximize
profit
• Total cost  the market value of the inputs a firm uses in production
• Profit  total revenue minus total cost
• Total revenue equals the quantity of output the firm produces times
the price at which it sells its output
Costs as Opportunity Costs
• When economists speak of a firm’s cost of production, they include all
the opportunity costs of making its output of goods and services
• Explicit costs  input costs that require an outlay of money by the firm
• Implicit costs  input costs that don’t require an outlay of money by the
firm
• Total cost is the sum of explicit and implicit costs
• Econ are interested in studying how firms make production and pricing
decisions
o These decisions are based on both explicit and implicit costs
• Accountants include both when measuring a firm’s costs
o Have a job of keeping track of the money that flows into and out of
firms
o They only measure explicit costs
The Cost of Capital as an Opportunity Cost
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