Lecture VII – Production Theory Chapter 9
Professor Matt Festa
I) Economic Costs
a. Opportunity cost- the cost of a resource used is the next best option you could have used the resource for
b. Explicit costs – costs the firm must make (like monetary payments for labor and supplies
c. Implicit costs – are the opportunity costs of using the resources.
d. Economic costs therefore include both explicit and implicit costs (even if you made a profit, the resources could in theory have been used for something else that was even more profitable. That alternative is a cost to economists that must be added in.
e. Economic profit = total revenue – economic cost
f. Accounting Profit = total revenue – total explicit costs.
g. Key graph on Page 153 (big time key graph!!!)
II) Short run Production costs
a. Fixed costs
b. Variable Costs
c. Total Cost = fixed + variable costs.
d. Average Fixed Costs
e. Average Variable Costs
f. Average Total Costs
g. Marginal Cost = change in total cost/change in q
III) Long run production Costs - Figure 9.7
IV) Economies of Scale
a. Labor specialization
b. Managerial specialization
d. Other factors
e. Note the first portion is the name of the blog, increasing returns (to scale).