ECON10004 Lecture Notes - Lecture 6: Average Variable Cost, Marginal Cost, Marginal Product
Microeconomics Week 6
CHAPTER 13: THE COSTS OF PRODUCTION
Total Revenue (for a firm): the amount a firm receives for the sale of its output
Total Cost: the amount a firm pays to buy the inputs into production
Profit: total revenue minus total cost
Costs as Opportunity Costs
• Explicit costs such as $1000 for flour and $100 for wages
• Implicit costs such as sacrificing $100 an hour during business as the owner can make
$100 doing another job/activity
• Total cost is the sum of explicit and implicit costs
The cost of Capital as an Opportunity Cost
• Important implicit cost of most businesses: the opportunity cost of the financial
capital invested in business
Economic Profit versus Accounting Profit
PRODUCTION AND COSTS
Long Run: the period of time needed for all factors of production to become variable
Short Run: a period of time during which at least one factor of production is fixed
find more resources at oneclass.com
find more resources at oneclass.com
The Production Function
Production Function: the relationship between quantity of inputs used to make a good and
the quantity of output of that good
Marginal Product: the increase in output that arises from an additional unit of input
Diminishing Marginal Product: the property whereby the marginal product of an input
declines as the quantity of the input increases
From the production function to the total-cost curve
• I Poh’s akes eaple, total ost is ost of fator ad ost of orker/s
find more resources at oneclass.com
find more resources at oneclass.com
THE VARIOUS MEASURES OF COST
Fixed Costs: costs that do not vary with the quantity of output produced
Eg. Rent
Variable Costs: costs that vary with the quantity of output produced
Eg. Cost of milk, beans and sugar to produce coffee
Average and Marginal Costs
Average Total Cost: total cost divided by the quantity of output
• Because total cost is sum of fixed and variable costs, average total costs can be
expressed as the sum of average fixed cost and average variable cost
• Tells cost of typical unit but not how much total costs will change as the firm alters
its level of production
Average Fixed Cost: fixed costs divided by the quantity of output
Average Variable Cost: variable costs divided by the quantity of output
Marginal Cost: the increase in total cost that arises from an extra unit of production
• Eg. If George increase production from two to three cups and cost rises from $3.80
to $4.50, marginal cost of third cup of coffee is $4.50 – $3.80 = $0.70
ATC = TC / Q
MC = ΔTC / ΔQ
• TC = Total Cost
• Q = Quantity of product
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Total revenue (for a firm): the amount a firm receives for the sale of its output. Total cost: the amount a firm pays to buy the inputs into production. Costs as opportunity costs: explicit costs such as for flour and for wages. Implicit costs such as sacrificing an hour during business as the owner can make. doing another job/activity: total cost is the sum of explicit and implicit costs. The cost of capital as an opportunity cost. Important implicit cost of most businesses: the opportunity cost of the financial capital invested in business. Long run: the period of time needed for all factors of production to become variable. Short run: a period of time during which at least one factor of production is fixed. Production function: the relationship between quantity of inputs used to make a good and the quantity of output of that good.