TAILIEUCHUNG - Lecture Economics: Chapter 12 - Dean Karlan, Jonathan Morduch

Chapter 12: The costs of production. In this chapter you will learn: How to define total revenue, total cost, and profit? How to calculate economic and accounting profit? How to define marginal product and show diminishing marginal product? How to define average and marginal cost?. | Chapter 12 The Costs of Production © 2014 by McGraw-Hill Education 1 What will you learn in this chapter? • How to define total revenue, total cost, and profit. • How to differentiate between: – Fixed and variable costs. – Explicit and implicit costs. • How to calculate economic and accounting profit. • How to define marginal product and show diminishing marginal product. • How to define average and marginal cost. • How to think about long-run and short-run costs. • How to define returns to scale and its implications. © 2014 by McGraw-Hill Education 2 Revenues, costs, and profits • A firm’s goal is to maximize profits: Profit = Total revenue – Total cost • Total revenue is the amount that a firm receives from the sale of goods and services and is calculated as the quantity sold multiplied by the price paid for each unit: Total revenue = Quantity x Price = (Q1xP1) + (Q2xP2) + + (QnxPn) • Total cost is the amount that a firm pays for inputs used to produce goods or services. • While total revenue is simple to calculate, costs are more complex and harder to calculate. © 2014 by McGraw-Hill Education 3 1 Active Learning: Calculating total revenue • Suppose a firm produces two goods: – Bouncy balls that sell for $1. – Gumball machines that sell for $25. • Last year the firm sold 100,000 balls and 10,000 gumball machines. Calculate total revenue. © 2014 by McGraw-Hill Education 4 Fixed and variable costs • A firm’s total cost is defined as: Total costs = Fixed costs + Variable costs • Fixed costs are costs that do not depend on the quantity of output produced. – One-time, upfront payments before production begins, like buying equipment. – Ongoing payments, like monthly rents. • Fixed costs are constant as quantity increases. • Even if a firm produces nothing, it still incurs a fixed cost. © 2014 by McGraw-Hill Education 5 Fixed and variable costs • Variable costs are those that depend on the quantity of output produced. – Includes raw materials as well

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