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Chapter 13: Costs of ProductionPowerPoint Presentation

Chapter 13: Costs of Production

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### Chapter 13: Costs of Production

The Supply and Demand

- In Economy, Supply and Demand Basically runs all market activity.
- Supply and Demand is the most basic and the most important prefecture of Economy

Law of Supply

- In the Law of Supply implies that a firm is willing to produce quantity of good, if the price is high enough
- Causing Supply curve to go upwards.

Revenue, Cost, and Profit

- Firms always try to maximize their revenue, and profit.
- Total Revenue: The amount received after selling the product.
- Total Cost: How much it costs to create a single item.
- Total Revenue – Total Cost = Profit

Firm’s Profits

- In the Firm’s Cost, there exists the Explicit Cost, and the Implicit Cost
- Explicit Cost: Direct outlay of money
- Implicit Cost: Cost not exactly requiring tangible money

Economic Profit vs. Accounting Profit

- Economist view profit with total revenue minus Explicit cost Minus Implicit Cost.
- Accountants view profit with total revenue minus only the Explicit Cost
- Therefore making the Economic Profit less than Accounting Profit

The Production

- In production, there are Key Terms to be realized.
- Such as Marginal Product: any increase in the input process, for additional units
- Diminishing Marginal Product: Rule which says, Marginal quantity decreases as Q of input increases

Costs of Production

- Fixed Costs: Costs that do not change with the amount of input or output used.
- Variable Cost: Costs that change with the amount of item a firm produces.
- Total Cost:
- Total Cost = Total Fixed Cost + Total Variable Cost

Cost of Production

- Average Cost: Average cost is determined by the amount cost divided by the amount produced.
- Average Total Cost = Average Fixed Cost + Average Variable Cost

Marginal Cost

- MC equals Amount of Cost, by the Amount of quantity

ATC

- ATC is U Shaped if graphed
- ATC declines as output increases
- ATC starts rising because variable cost rises

ATC

- At the Bottom of the ATC curve may result in minimizing ATC, which becomes the
- EFFICIENT SCALE OF ECONOMY

MC and ATC

- Whenever MC is less than ATC, ATC is falling
- Whenever MC is greater than ATC, the ATC is rising.

Econmy and Diseconomist

- Diseconomy of Scale: refer to the property whereby long-run average total cost rises as the quantity of output increases.
- Constant Returns of Scale: The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

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