Lecture Essentials of economics (3/e): Chapter 6 - Brue, McConnell, Flynn

Chapter 6 - Businesses and their costs. This chapter develops a number of crucial cost concepts that will be employed in the succeeding three chapters to analyze the four basic market models. These concepts prepare students for both total-revenue–total-cost and marginal-revenue–marginal-cost approaches to profit maximization, which are presented in the next few chapters.

obtain and retain the services of a

= Revenue – Explicit costs

= Accounting profit – Implicit costs

= Total revenue – Economic costs

= Total revenue – Explicit costs – Implicit Costs

LO2

Explicit costs

Accounting costs (explicit costs only)

Implicit costs (including a normal profit)

Economic profit

Accounting profit

Change in labor input

(2) Total Product

(TP)

(3) Marginal Product (MP) Change in (2)/ Change

in (1)

(4) Average Product (AP), (2)/(1)

-1 10 10 Increasing

marginal returns

8.75

6­11

TP

AP

Increasing Marginal Returns

Diminishing Marginal Returns

Negative Marginal Returns

1 2 3 4 5 6 7 8 9 0

10 20 30

• Average fixed costs AFC = TFC/Q

• Average variable costs AVC = TVC/Q

• Average total costs ATC = TC/Q

• Marginal costs MC =ΔTC/ΔQ

LO4

Total, Average, and Marginal Cost Schedules for an Individual Firm in the Short Run

Total Cost Data Average Cost Data Marginal Cost

(1) Total Product (Q)

(2) Total Fixed Cost (TFC)

(3) Total Variable Cost (TVC)

(4) Total Cost (TC)

TC = TFC + TVC

(5) Average Fixed Cost (AFC) AFC = TFC/Q

(6) Average Variable Cost (AVC) AVC=TVC/Q

(7) Average Total Cost (ATC) ATC = TC/Q

(8) Marginal Cost (MC)

MC

ATC AVC

AVC AFC

amounts, including plant size

The Long­Run Cost Curve  

LO4

Long-run ATC

long-run average costs are minimized

industry

6­25