1. Total Costs
Chapter 13

2. The Production FunctionTP MP AP
Shape of product curves
determines the costs curves
for a business

3. Opportunity Costs
A firm’s cost of production must include all opportunity costs
Both explicit & implicit
Explicit costs- input costs that require a direct outlay of money
Implicit costs- input costs that do not require an outlay of money

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

5. Economists vs. Accountants
How an Economist
How an Accountant
Views a Firm
Views a Firm
Total
Revenue
$1,000
Economic
Profit
$825
1) Value of your time
2) Loss of interest on
$ invested
3) Etc….
Accounting
Profit
$900
Total
Revenue
$1,000
Implicit
Costs
$75
Total
opportunity
costs
Explicit
Costs
$100
Explicit
Costs
$100
Anything paid for
in dollars

6. Costs of Production
Fixed costs - do not change with quantity of output
Rent on factory, utilities, etc….
Variable costs - change with quantity of output
# workers, qty of steel, etc…
Marginal cost measures the increase in total cost that arises from an extra unit of production
How much does it cost to produce an additional unit of output?

7. Costs of Production TC = TFC + TVC Variable Costs Fixed Costs Total
Total Costs (TC)
Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Fixed
Costs
Total
Cost

8. Marginal Costs Total Cost @ 3 units: Total Cost @ 4 units:
$4.50
Total 4 units:
$5.40
Marginal Cost = $0.90

9. Worksheet: The Cost Function