Cost of Production

Good Essays
Ralph T. Byrns

Modern Microeconomics 2001

©

Chapter 8

The Costs of Production

Production and Costs Costs in the Short Run Fixed Costs Implicit Costs Explicit Costs Variable Costs Average Costs Marginal Costs The Symmetry Between Production and Costs Total Product and Total Cost Curves Geometry of Average and Marginal Costs Curves Average Physical Product and Average Variable Costs Marginal Physical Product and Marginal Cost Costs in the Long Run Isocost Lines Cost Minimization The Expansion Path and the Long Run Total Cost Curve Average Cost and Marginal Cost in the Long Run Returns to Scale and the Long Run AC Curve Minimum Efficient Scale Technological Changes and Costs Technological Advance as a Response to Profit Incentives International Markets as Forces for Change Exogenous Technological Change

11/5/01 12:45PM

Chapter 8 The Costs of Production

page 1

Ralph T. Byrns

Modern Microeconomics 2001

©

Chapter 8:

The Costs of Production
So far we have looked at one aspect of the production process — resource productivity. We will now examine the other crucial component — costs. Ultimately, costs help determine the resource mix a firm will use, how much output a firm will produce, whether profit is realized, and whether a firm will continue to produce in the long run.

Costs in the Short Run
Production costs are broken down into two broad categories: fixed costs and variable costs. Total costs are the sum of all fixed and variable costs and can be expressed as: TC = TFC + TVC where TC is total costs, TFC is total fixed costs, and TVC is total variable costs.

Fixed Costs
Fixed costs arise because some inputs are fixed in the short run. For example, plant size and capital are typically fixed in the short run, and payments for their use — monthly rent, property taxes, loan payments for capital, etc., — are costs a firm incurs regardless of the level of production: 1,000 units a day, 100 units a day, or 0 units a day. Fixed

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