Ch21: Costs and the Supply of Goods

• In a market economy, firm owners are residual owners
• Methods of Production: Contracting (work with company) and Team Production (work under company)
• Shirking is working less than normal rate of productivity (long coffee breaks)
• Principal-agent problem: Buyer has less info than the seller about purchased services
• Types of business firms: Proprietorship (owned by one person), Partnership (co-owners), and Corporation (stakeholders)
• Less corporations but they own more business revenue in USA
• Explicit costs: Monetary payment made
• Implicit cost: resources owned, no monetary paid
• Total Cost= Explicit + Implicit
• Economy Profit (Pi)= TR - TC(w/OC)
• Accounting total cost: TR - TC (no OC) but larger than Econ Pi
• Short-run: short period of time where one factor of production gets fixed
• Long run: Period of time enough to change all factors of products
• TFC (Total fixed costs): cost that remain changed in short run
• AFC (Avg. Fixed Costs): fixed costs per unit (TFC/Output)
• AVC (avg. Variable costs): variable costs per unit (TVC/output)
• TVC (total variable costs): cost that changes with output in short run
• MC (marginal cost): increase in total cost from producing an additional unit
• Average total cost (ATC): Average fixed cost + Average variable cost
• Total cost (TC): Total fixed cost + Total variable cost
• The ATC curve is U-shaped
• Law of diminishing returns: As you increase the amount of a variable resource applied to a fixed resource, the increase in output will diminish progressively
• Total product: total output of a good associated with different levels of a variable input
• Marginal product: change in total product with a one more unit of a variable input
• Average product: Total product divided by the number of the units of the variable input
• If a firm faces diminishing returns, MC will rise with additional output (it will eventually exceed ATC and raise ATC) 
• The long-run ATC shows the minimum average cost of producing each output level when a firm is able to choose plant size
• Economies of scale: Reductions in per unit costs as output (plant size) expands can occur for three reasons: Mass production & Specialization & Improvements in production as a result of experience
• Diseconomies of scale: rises in per unit costs as output (plant size) expands can occur
• There are four cost curve shifters: resource prices, taxes, regulations, and technology
• Sunk costs are historical costs associated with past decisions that can’t be changed
• TC & TVC will look the same since they go up at the same rate
• AVC & AFC equal ATC and graphically is below