The document discusses key concepts related to a firm's costs of production. It defines total revenue, total cost, and profit. It explains the differences between explicit and implicit costs, as well as opportunity costs. Economic profit considers both explicit and implicit costs, while accounting profit only considers explicit costs. The document also discusses production functions and how they relate to marginal product. It introduces the different measures of a firm's costs, including total, average, fixed, and variable costs. Finally, it defines marginal cost as the change in total cost from a one-unit change in output.

1. Costs and Production

2. The Firm’s Objective
The Firm’s Objective
• The economic goal of the firm is to
maximize profits
Firms are willing to produce and sell a greater
quantity of a good when the price of the good
is high.

3. A Firm’s Total Revenue and
Total Cost
Total Revenue
• The amount that the firm receives for the
sale of its product.
Total Cost
• The amount that the firm pays to buy
inputs.

4. A Firm’s Profit
Profit
• The firm’s total revenue minus its total cost
• It is the amount a seller is paid minus costs
paid to produce.
Profit = Total revenue - Total cost

5. Explicit and Implicit Costs
Explicit costs
are input costs that require a direct outlay of
money by the firm.
Implicit costs
are input costs that do not require an outlay of
money by the firm.

6. Opportunity Costs
A firm’s cost of production includes all the
opportunity costs of making its output of
goods and services.
Opportunity Costs
• Includes implicit costs of the firm

7. Example (Opportunity Cost)
• Helen uses $300 000 of her savings to buy her cookie
factory from the previous owner.
• If she had left her money in a savings account that pays
an interest at a rate of 5 percent, she would have earned
$15 000 a year.
• Helen by buying a cookie factory has foregone
• $15 000 of an interest income.
• This foregone $15 000 is an implicit opportunity cost of
Helen’s business.

8. Economic Profit versus
Accounting Profit
Economic Profit
Economists measure a firm’s economic profit as total
revenue minus total cost, including both explicit and
implicit costs.
Accounting Profit
Accountants measure the accounting profit as the
firm’s total revenue minus only the firm’s explicit
costs

9. Economic Profit versus
Accounting Profit
When total revenue exceeds both explicit and
implicit costs, the firm earns economic profit.
When total revenue exceeds only explicit costs,
the firm earns accounting profit.
 Economic profit is smaller than accounting
profit

10. Economic Profit versus
Accounting Profit
Revenue
Total Cost
opportunity
costs
Explicit
costs
How an Economist
Views a Firm
Economic
profit
Implicit
costs

11. Economic Profit versus
Accounting Profit
Revenue
Total Cost
opportunity
costs
How an Economist
Views a Firm
Explicit
costs
Economic
profit
Implicit
costs
Explicit
costs
Accounting
profit
How an Accountant
Views a Firm
Revenue

12. Production and Costs
The Production Function
The production function shows the relationship
between quantity of inputs used to make a
good and the quantity of output of that good.
Marginal Product
The marginal product is the increase in output
that arises from an additional unit of input

13. The marginal product of an
input
The marginal product of an input
is the increase in the quantity of output
obtained from an additional unit of that input
Marginal product = Additional output
Additional input

14. Diminishing marginal product
Diminishing marginal product is the character
whereby the marginal product of an input
declines as the quantity of the input increases.
Example: As more and more workers are hired at a
firm, each additional worker contributes less and less
to production because the firm has a limited amount of
equipment.

15. Table 13-1: A Production Function and Total Cost:
Hungry Helen’s Cookie Factory
Total cost of
inputs (cost
of factory +
Cost of
worker
Cost of
factory
Marginal
product of
Output
(quantity of
cookies
producedper
hour)
labour cost of
workers)
0 0 $30 $0 $30
1 50
50
30 10 40
2 90
40
30 20 50
3 120
30
30 30 60
4 140
20
30 40 70
5 150
10
30 50 80
Number of
workers
Chapter 13: Page 15
Mankiw et al. Principles of Microeconomics, 2nd Canadian
Edition

16. Example Production Function and
Total Cost: Helen’s Cookie Factory
Number
of
Workers
Output
(Quantit
y)
Cost
of
Factor
y
Cost of
Worker
s
Total
Cost of
Inputs
Marginal
Product
of Labor
0 0 $30 $0 $30
1 50 30 10 40 50
2 90 30 20 50 40
3 120 30 30 60 30
4 140 30 40 70 20
5 150 30 50 80 10

17. 0
Number of
Workers Hired
Quantity of
Output
(cookies per
hour)
4
2
1 3 5
50
90
150
140
120
Marginal
Product of
labor
Hungry Helen’s Production Function;
Marginal Product of Labor

18. Total-Cost Curve
Total
Cost
$80
70
60
50
40
30
20
10
0 20 40 60 80 100 120 140 Quantity of Output
(cookies per hour)
Total-cost
curve

19. The Various Measures of
Cost
Costs of production may be divided into fixed
costs and variable costs
Fixed costs are those costs that do not vary
with the quantity of output produced.
Variable costs are those costs that do vary
with the quantity of output produced.

20. Total Costs
Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Total Costs (TC)
TC = TFC + TVC

21. Total Costs
Quantity Fixed Cost Variable
Cost
Total Cost
0 $3.00 $ 0.00 $ 3.00
1 3.00 0.30 3.30
2 3.00 0.80 3.80
3 3.00 1.50 4.50
4 3.00 2.40 5.40
5 3.00 3.50 6.50
6 3.00 4.80 7.80
7 3.00 6.30 9.30
8 3.00 8.00 11.00
9 3.00 9.90 12.90
10 3.00 12.00 15.00

22. Average Costs
Average costs can be determined by dividing the
firm’s costs by the quantity of output produced.
The average cost is the typical cost of each unit of
product.
Average Fixed Costs (AFC)
Average Variable Costs (AVC)
Average Total Costs (ATC)

23. Average Costs

24. Average Costs
Quantity AFC A
VC A
TC
0 — — —
1 $3.00 $0.30 $3.30
2 1.50 0.40 1.90
3 1.00 0.50 1.50
4 0.75 0.60 1.35
5 0.60 0.70 1.30
6 0.50 0.80 1.30
7 0.43 0.90 1.33
8 0.38 1.00 1.38
9 0.33 1.10 1.43
10 0.30 1.20 1.50

25. The Various Measures of Cost: Thirsty Thelma’s
Lemonade Stand
0.30
0.50
0.70
0.90
1.10
1.30
1.50
1.70
1.90
2.10
Marginal
Cost
Average Average
Total Cost
Fixed
Cost
Variable
Cost
Fixed
Cost
Variable
Cost
Average
Total Cost
$ 3.00 $ 3.00 $ 0.00 --------- --------- ---------
3.30 3.00 0.30 $ 3.00 $ 0.30 $ 3.30
3.80 3.00 0.80 1.50 0.40 1.90
4.50 3.00 1.50 1.00 0.50 1.50
5.40 3.00 2.40 0.75 0.60 1.35
6.50 3.00 3.50 0.60 0.70 1.30
7.80 3.00 4.80 0.50 0.80 1.30
9.30 3.00 6.30 0.43 0.90 1.33
11.00 3.00 8.00 0.38 1.00 1.38
12.90 3.00 9.90 0.33 1.10 1.43
15.00 3.00 12.00 0.30 1.20 1.50
Quantity
of
lemonade
(Glasses per
hour)
0
1
2
3
4
5
6
7
8
9
10

26. Marginal Cost
Marginal cost (MC) measures the increase in
total cost that arises from an extra unit of
production.
Marginal cost helps answer the following
question:
 How much does it cost to produce an additional unit
of output?

27. Marginal Cost
MC =
Change in total cost
Change in quantity
= TC
Q

28. Marginal Cost
Quantity Total
Cost
Marginal
Cost
Quantity Total
Cost
Marginal
Cost
0 $3.00 —
1 3.30 $0.30 6 $7.80
2 3.80 0.50 7 9.30
3 4.50 0.70 8 11.00
4 5.40 0.90 9 12.90
5 6.50 1.10 10 15.00