1. Microeconomics
Lecture 13
!
The Costs
of Production

2. Key Terms
total cost
profit
explicit costs
implicit costs
economic profit
accounting profit
production function
marginal product
diminishing marginal
product
fixed costs
variable costs
average total costs
average fixed costs
average variable costs
marginal costs
efficient scale
economies of scale
diseconomies of scale
constant returns to scale

3. Riyadh Pizza Company

4. Total Cost TC

5. Total Cost TC
The market value of
all of the inputs a
firm uses in
production

6. Total Revenue
TR

7. Total Revenue
TR
Price x Quantity
!
TR = P x Q

8. Profit
PR

9. Profit
PR
Total Revenue minus
Total Cost
!
PR = TR - TC

10. Production Function

11. Production Function
The relationship
between inputs and
outputs

12. Marginal Product

13. Marginal Product
Additional output of
a unit of input

14. Diminishing Marginal
Product

15. Diminishing Marginal
Product
Marginal product
declines as input
increases

16. Fixed Costs
FC

17. Fixed Costs
FC
Costs that do not
vary with output

18. Variable Costs VC

19. Variable Costs VC
Costs that do vary
with output

20. Total Costs TC

21. Total Costs TC
Fixed costs plus
variable costs
!
TC = FC + VC

22. Average Total Costs
ATC

23. Average Total Costs
ATC
Total costs divided
by quantity of output
ATC = TC ÷ Q

24. Average Fixed Costs
AFC

25. Average Fixed Costs
AFC
Fixed costs divided
by quantity of output
AFC = FC ÷ Q

26. Average Variable Costs
AVC

27. Average Variable Costs
AVC
Variable costs
divided by quantity
of output
AVC = VC ÷ Q

28. Marginal Cost
MC

29. Marginal Cost MC
The increase in total
cost for the next
unit
MC = ∆TC ÷ ∆Q

31. Q
0
1
2
3
4
5
6
7
8
9
10

32. Fixed
Cost
Q FC
0 100
1
100
2
100
3
100
4
100
5
100
6
100
7
100
8
100
9
100
10
100

33. Fixed
Variable
Cost
Cost
Q FC
VC
0 100
1
100
20
2
100
39
3
100
59
4
100
84
5
100
120
6
100
160
7
100
212
8
100
270
9
100
340
10
100
420

34. Total
Fixed
Variable
Cost
Cost
Cost
TC
Q FC
VC
FC + VC
0 100
100
1
100
20
120
2
100
39
139
3
100
59
159
4
100
84
184
5
100
120
220
6
100
160
260
7
100
212
312
8
100
270
370
9
100
340
440
10
100
420
520

35. Total
Fixed
Variable
Cost
Cost
Cost
TC
Q FC
VC
FC + VC
0 100
100
Average
Fixed
Cost
AFC
FC ÷ Q
1
100
20
120
100
2
100
39
139
50
3
100
59
159
33
4
100
84
184
25
5
100
120
220
20
6
100
160
260
17
7
100
212
312
14
8
100
270
370
13
9
100
340
440
11
10
100
420
520
10

36. Total
Fixed
Variable
Cost
Cost
Cost
TC
Q FC
VC
FC + VC
0 100
100
Average
Average
Fixed
Variable
Cost
Cost
AFC
AVC
FC ÷ Q VC ÷ Q
1
100
20
120
100
20.0
2
100
39
139
50
19.5
3
100
59
159
33
19.7
4
100
84
184
25
21.0
5
100
120
220
20
24.0
6
100
160
260
17
26.7
7
100
212
312
14
30.3
8
100
270
370
13
33.8
9
100
340
440
11
37.8
10
100
420
520
10
42.0

37. Total
Fixed
Variable
Cost
Cost
Cost
TC
Q FC
VC
FC + VC
0 100
100
Average
Average
Average
Fixed
Variable
Total
Cost
Cost
Cost
AFC
AVC
ATC
FC ÷ Q VC ÷ Q TC ÷ Q
1
100
20
120
100
20.0
120.0
2
100
39
139
50
19.5
69.5
3
100
59
159
33
19.7
53.0
4
100
84
184
25
21.0
46.0
5
100
120
220
20
24.0
44.0
6
100
160
260
17
26.7
43.3
7
100
212
312
14
30.3
44.6
8
100
270
370
13
33.8
46.3
9
100
340
440
11
37.8
48.9
10
100
420
520
10
42.0
52.0

38. Total
Fixed
Variable
Cost
Cost
Cost
TC
Q FC
VC
FC + VC
0 100
100
Average
Average
Average
Marginal
Fixed
Variable
Total
Cost
Cost
Cost
Cost
MC
AFC
AVC
ATC
FC ÷ Q VC ÷ Q TC ÷ Q ∆TC ÷ ∆Q
1
100
20
120
100
20.0
120.0
20
2
100
39
139
50
19.5
69.5
19
3
100
59
159
33
19.7
53.0
20
4
100
84
184
25
21.0
46.0
25
5
100
120
220
20
24.0
44.0
36
6
100
160
260
17
26.7
43.3
40
7
100
212
312
14
30.3
44.6
52
8
100
270
370
13
33.8
46.3
58
9
100
340
440
11
37.8
48.9
70
10
100
420
520
10
42.0
52.0
80

39. Total Cost Curve
600
570
540
510
480
450
420
390
360
330
300
270
240
210
180
150
120
90
60
30
0
0
1
2
3
4
5
6
7
8
9
10

40. Explicit Costs

41. Explicit Costs
Costs that require
money

42. Implicit Costs

43. Implicit Costs
Costs that do not
require money

44. Accounting Profit

45. Accounting Profit
Total Revenue minus
explicit costs

46. Economic Profit

47. Economic Profit
Total Revenue minus
both explicit costs
and implicit costs

48. Accounting Profit =
Total Revenue -
Explicit Costs
100 - 30 = 70
Economic Profit =
Total Revenue -
Explicit Costs - Implicit Cost
100 - 30 - 40 = 30
100
75
50
25
0
Accounting Profit
Economic Profit

49. Efficient Scale

50. Efficient Scale
The quantity of
output that
minimizes average
total cost

51. Short Run
vs.
Long Run

52. Short-Run

53. Short-Run
Cannot change a
fixed cost

54. Long-Run

55. Long-Run
Can change all costs
!
All costs become
variable

56. Economies of Scale

57. Economies of Scale
Long-run average
costs fall as quantity
of output increases

58. Diseconomies of Scale

59. Diseconomies of Scale
Long-run average
costs rise as quantity
of output increases

60. Constant Returns to
Scale

61. Constant Returns to
Scale
Long-run average
costs stays the same
as quantity of output
increases