The lost of production (CH13)

Summary:

• The goal of firms is to maximize profit, which equals total revenue minus total cost.
• When analyzing a firm's behavior, it is important o include all the importunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other Opportunity costs, such as the wages costs, such as the wages the firm owner gives up by working at the firm rather than taking another job, are implicit. Economic profit takes both explicit and implicit costs into account, whereas accounting profit considers only explicit costs.
• A firm's costs reflect its production process. A typical firm's production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm's total-cost curve get steeper as the quantity produced rises.
• A firm's total cost can be divided between fixed costs and variable costs. Fixed cost are costs that do not change when the firm alters the quantity of output produced. Variable costs are costs that change when the firm alters the quantity of output produced.
• From a firm;s total cost, two related measures of cost are derived. Average total cost is total cost divided by the quantity of output. Marginal cost is the amount by which total cost rises if output increases by 1 unit.
• When analyzing firm behavior, it is often useful to graph average total cost and marginal cost. For a typical firm, marginal cost rises which the quantity of output average total cost first falls as output increases and then rises as output increase further. The marginal-cost curve always crosses the average-total-cost curve at the minimum of average total cost.
• A firm's costs often depend on the time horizon considered. In particular, many costs are fixed in the short run but variable in the long run. As a result, when the firm changes its level of production, average total cost may rise more in the short run than the long run.