Economics Chapter 6 Summary
‘Background to supply: firms in competitive markets’
Costs as Opportunity Costs
A firm’s cost of production includes all the opportunity costs of making its output of goods and
services.
A firm’s cost of production include explicit costs and implicit costs.
Explicit costs – input costs that require an outlay of money by the firm.
Implicit costs – input costs that do not require an outlay of money by the firm.
Production and costs
The short run – the period of time in which some factors of production cannot be changed.
The long run – the period of time in which all factors of production can be altered.
Production function – the relationship between the quantity of inputs used to make a good and the
quantity of output of that good.
Q =f (K, L) K = capital L = labour
Marginal product – the increase in output that arises from an additional unit of input.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑎𝑐𝑡𝑜𝑟
Diminishing marginal product – the property whereby the marginal product of an input declines as
the quantity of the input increases.
Total cost curve:
Costs of production may be divided into fixed costs and variable costs.
Fixed costs – costs that are not determined by the quantity of output produced.
Variable costs – costs that are dependent on the quantity of output produced.
Total Costs
• Total Fixed Costs (TFC)
• Total Variable Costs (TVC) • TC = TFC + TVC
• Total Costs (TC)
Average Costs
• The average cost is the cost of each typical unit of product.
Types of Average Cost
• Average Fixed Costs (AFC) = FC/Q
• Average Variable Costs (AVC) = VC/Q • ATC = AFC + AVC
• Average Total Costs (ATC) = TC/Q
Margin costs – the increase in the total cost that arises from an extra unit of production.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 Δ𝑇𝐶
=
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 Δ𝑄
‘Background to supply: firms in competitive markets’
Costs as Opportunity Costs
A firm’s cost of production includes all the opportunity costs of making its output of goods and
services.
A firm’s cost of production include explicit costs and implicit costs.
Explicit costs – input costs that require an outlay of money by the firm.
Implicit costs – input costs that do not require an outlay of money by the firm.
Production and costs
The short run – the period of time in which some factors of production cannot be changed.
The long run – the period of time in which all factors of production can be altered.
Production function – the relationship between the quantity of inputs used to make a good and the
quantity of output of that good.
Q =f (K, L) K = capital L = labour
Marginal product – the increase in output that arises from an additional unit of input.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑎𝑐𝑡𝑜𝑟
Diminishing marginal product – the property whereby the marginal product of an input declines as
the quantity of the input increases.
Total cost curve:
Costs of production may be divided into fixed costs and variable costs.
Fixed costs – costs that are not determined by the quantity of output produced.
Variable costs – costs that are dependent on the quantity of output produced.
Total Costs
• Total Fixed Costs (TFC)
• Total Variable Costs (TVC) • TC = TFC + TVC
• Total Costs (TC)
Average Costs
• The average cost is the cost of each typical unit of product.
Types of Average Cost
• Average Fixed Costs (AFC) = FC/Q
• Average Variable Costs (AVC) = VC/Q • ATC = AFC + AVC
• Average Total Costs (ATC) = TC/Q
Margin costs – the increase in the total cost that arises from an extra unit of production.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 Δ𝑇𝐶
=
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 Δ𝑄
