The Cost Function

1
The Cost Function

• Chapter 13

2
The Production Function
Shape of product curves determines the costs
curves for a business
3
Opportunity Costs

• A firms cost of production must include all
  opportunity costs
• Both explicit implicit
• Explicit costs- input costs that require a direct
  outlay of money
• Example attending college gt tuition, books,
  etc.
• Implicit costs- input costs that do not require
  an outlay of money
• Example attending college gt cant work (loss
  of income)

4
Economic Profit vs. Accounting Profit

• Economic profit total revenue - total costs
• both explicit implicit costs
• Accounting profit total revenue - explicit
  costs
• no implicit costs!
• Economic profit is smaller than accounting profit
• Firms maximize economic profit
• All cost curves include both implicit explicit
  costs

5
Economists vs. Accountants
How an Economist
How an Accountant
Views a Firm
Views a Firm
6
Costs of Production

• Fixed costs - do not change with quantity of
  output
• Rent on factory, machinery, insurance, etc.
  (they are sunk!)
• Variable costs - change with quantity of output
• Cost of workers, cost of inputs, etc
• Marginal cost increase in total cost from an
  extra unit of production
• Cost to produce one additional good/service

Total Costs Fixed Costs Variable Costs
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Costs of Production
FC VC TC Fixed Costs (FC)
Variable Costs (VC) Total Costs (TC)
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Marginal Costs (MC) ? Total Cost
Total Cost _at_ 3 units 4.50
Total Cost _at_ 4 units 5.40
MC of 4th unit 0.90 MC of 5th unit 1.10
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Worksheet The Cost Function