The costs of production

• Total revenue


  The amount a firm receives for the sale of its output
• Total cost


  The market value of the inputs a firm uses in production
• Profit


  Total revenue minus total cost
• Explicit costs


  Input costs that require an outlay of money by the firm
• Implicit costs


  Input costs that do not require an outlay of money by the firm
• Economic profit


  Total revenue minus total cost, including both explicit and implicit costs
• Accounting profit


  Total revenue minus total explicit cost
• Economists include all opportunity costs when analyzing a firm, while accountants measure only explicit costs
• Economic profit is smaller than accounting profit
• Production function


  The relationship between the quantity of inputs used to make a good and the quantity of output of that good
• As the number of workers hired increases


  The production function gets flatter, reflecting diminishing marginal product
• As the quantity of output produced increases


  The total-cost curve gets steeper because of diminishing marginal product
• Production function


  Relationship between the number of workers hired and the quantity of output produced
• The production function gets flatter as the number of workers increases, reflecting diminishing marginal product
• Total-cost curve


  Relationship between the quantity of output and the total cost of production
• The total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product
• Marginal product


  The increase in output that arises from an additional unit of input
• As the number of workers increases, the marginal product declines
• Diminishing marginal product


  The property whereby the marginal product of an input declines as the quantity of the input increases
• Diminishing marginal product is apparent in the production function, as the slope (marginal product) declines as the number of workers increases
• Fixed costs


  Costs that do not vary with the quantity of output produced
• Variable costs


  Costs that vary with the quantity of output produced
• Total cost is the sum of fixed and variable costs
• Average total cost


  Total cost divided by the quantity of output
• Average fixed cost


  Fixed cost divided by the quantity of output
• Average variable cost


  Variable cost divided by the quantity of output
• Marginal cost


  The increase in total cost that arises from an extra unit of production
• Marginal cost is the amount that total cost rises when the firm increases production by 1 unit of output
• The marginal-cost curve rises as the quantity of output produced increases, reflecting diminishing marginal product
• The average-total-cost curve is U-shaped, first falling and then rising
• When marginal cost is below average total cost, average total cost is falling; when marginal cost is above average total cost, average total cost is rising
• Quantity of output


  The amount of goods or services produced
• Marginal cost


  • It eventually rises with the quantity of output
• Average total cost curve


  • It is U-shaped
• Marginal cost is less than average total cost


  Average total cost is falling
• Marginal cost is greater than average total cost


  Average total cost is rising
• The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost
• Typical firm's cost curves


  • Marginal cost eventually rises with quantity of output
  • Average total cost curve is U-shaped
  • Marginal cost curve crosses average total cost curve at minimum of average total cost
• Economies of scale


  When long-run average total cost declines as output increases
• Diseconomies of scale


  When long-run average total cost rises as output increases