The document provides information on costs, including: 1) It distinguishes between explicit costs, which require an outlay of money, and implicit costs, which do not require a cash outlay but represent foregone opportunities. Both types of costs are important for business decisions. 2) It explains the differences between accounting profit, which only considers explicit costs, and economic profit, which considers total costs including implicit costs. Accounting profit will generally be higher since it ignores implicit costs. 3) It discusses different types of costs businesses face, including fixed costs which do not vary with output, and variable costs which do vary with output. Marginal costs represent the change in total costs from producing one additional unit.

1. Bellringer
1. Get out your project and finish it
Today is your last day in class to work on it.
After Wed. 10/16 it will be late and I will
deduct 30% off your project grade
2. Work on the three other assignments, oil
packet, price ceilings or Atari. Or review
TRIBE and PEST and review your quiz #3

2. Bellringer
Review: Utility, Marginal
1. Draw a small chart in your notes showing your
level of alertness throughout your school day on
a Monday. 0 being not alert and 10 being “top of
your game”
1st
0-10
2nd
0-10
3rd
0-10
4th
0-10
5th
0-10
Mankiw Chapter
13 Costs

3. Law of Diminishing Marginal Returns
• Benefit of extra input decreases from the last
•
•
•
•
•
•
Songs
Movies
Video games
Alcohol
Being in school
Studying

4. • Costs!

5. Total Revenue, Total Cost,
Profit
• We assume that the firm’s goal is to
maximize profit.
Profit = Total revenue – Total cost
the amount a
firm receives
from the sale
of its output
THE COSTS OF
PRODUCTION
5
the market
value of the
inputs a firm
uses in
production

6. Costs: Explicit vs. Implicit
• Explicit costs require an outlay of money,
e.g., paying wages to workers.
• Implicit costs do not require a cash outlay,
e.g., the opportunity cost of the owner’s time.
• Remember one of the Ten Principles:
The cost of something is
what you give up to get it.
• This is true whether the costs are implicit or
explicit. Both matter for firms’ decisions.
THE COSTS OF
PRODUCTION
6

7. Explicit vs. Implicit Costs: An Example
You need $100,000 to start your business.
The interest rate is 5%.
• Case 1: borrow $100,000
– explicit cost = $5000 interest on loan
• Case 2: use $40,000 of your savings,
borrow the other $60,000
– explicit cost = $3000 (5%) interest on the loan
– implicit cost = $2000 (5%) foregone interest
you could have earned on your $40,000.
In both cases, total (exp + imp) costs are $5000.
THE COSTS OF
PRODUCTION
7

8. Economic Profit vs. Accounting Profit
• Accounting profit
= total revenue minus total explicit costs
• Economic profit
= total revenue minus total costs (including
explicit and implicit costs)
• Accounting profit ignores implicit costs,
so it’s higher than economic profit.
THE COSTS OF
PRODUCTION
8

9. ACTIVE LEARNING
2
Economic profit vs. accounting profit
The equilibrium rent on office space has just
increased by $500/month.
Compare the effects on accounting profit
and economic profit if
a. you rent your office space
b. you own your office space
9

10. ACTIVE LEARNING
Answers
2
The rent on office space increases $500/month.
a. You rent your office space.
Explicit costs increase $500/month.
Accounting profit & economic profit each fall
$500/month.
b. You own your office space.
Explicit costs do not change,
so accounting profit does not change.
Implicit costs increase $500/month (opp. cost
of using your space instead of renting it),
so economic profit falls by $500/month.
10

11. An unsuccessful business
• Costs that they can change tomorrow
• Costs that they can’t change

12. Let’s think more specifically about costs
• Fixed Costs = costs that do not change based
on production and don’t change in SR
• Examples: capital goods, tools, buildings, menus
Coke factory in Atlanta, Georgia
Nokia factory in Finland

13. BR Quiz
1.
2.
3.
4.
Write 3 examples of FC for this firm
Write 3 examples of VC for this firm
How could this firm increase its TR?
Give an example of diminishing marginal
returns from your life

14. Special fixed costs
• “Entry costs” – costs to start up the
business
Business with low
Entry costs
Business with
very high
Entry costs

15. Costs we can change in the short run
Variable costs = costs
that change based on
production
The more I produce, the
more cost I will incur.
If I don’t produce at all,
my variable costs will
be 0
For example: labor,
electricity, raw
materials
Nike factory in China

16. Michael Jordan visiting Nike Factory in 1999
Why produce in China?

17. Marginal Costs
• Marginal costs =
the cost of
producing 1
additional unit
• For example:
Widgets FC VC MC
• Why helpful?
• Diminishing
marginal product!
0
1
2
3
4
1
1
1
1
1
0
6
11
16
22
X

18. Total Costs
• Total Costs = fixed + variable costs
For example:
Assume Widgets
Widgets FC VC TC MC Revenue Profit
0
1
2
3
4
1
1
1
1
1
0
1
2
3
5
1
2
3
4
6
X
1
1
1
2
0
2
4
6
8
-1
0
1
2
2
price
$2/each

19. Averages
• Do you guys bring up or down the GPA of all
of Pueblo high school?
• Does the track and field team bring up or
down the average weight of Pueblo High
School?
• Does a high average cost of living mean that
everyone spends a lot to live in California?

20. Average Costs
• Average Fixed Costs = FC/Q
• Average Variable Costs = VC/Q
• ATC = TC/Q

21. 1
Group assignment
2

22. Groups
page 276
Problem #4
Problem #6