1. Why does production have a cost? because...

2. Scarcity Inputs are scarce. They have opportunity costs.

3. What do entrepreneurs want? Maximum profit? Satisfaction from career? To serve others? Thrills from competition?

4. Revenue All gains. Sales: prices times quantities Also from subsidies.

5. Profit and cost Revenue minus cost. Cost: foregone opportunity. Costs: explicit and implicit. Supply costs include all opportunity costs.

6. Explicit costs Paid to someone else. Recorded by an accountant or bookkeeper. Includes annual depreciation, because the purchase is explicit.

7. Implicit costs Non-recorded opportunity costs. Example: highest wage a self- employed person could earn as an employee. Example: normal returns to assets,.e.g. interest on bonds.

8. Two types of profit Accounting profit: Revenue minus explicit costs. Economic profit: Revenue minus all costs. Which is the real profit? Which do economists use?

9. Production Short run: at least one input is fixed; does not vary with output. Long run: all costs are variable.

10. The production function Q = f (I), I a vector of inputs. A physical, not financial, relationship. Maximum output obtainable from inputs.

11. Products Average product of a factor: Quantity of output divided by the units of the factor. E.g. output divided by workers. Marginal product: the additional output from obtaining one more factor unit, all else constant.

12. The law of diminishing returns Only for the short run. At least one fixed input. As one adds units of a variable input, eventually its marginal product declines. The marginal product crosses the average product at the quantity for which... ?

13. Marginal and average product Where do they cross?

14. What range? At what range of quantity does a profit maximizing firm produce, relative to MP and AP?

15. . *

16. Cost and product When marginal product is rising, marginal cost is falling. When average product is rising, average cost is falling. Marginal cost crosses average cost at its minimum.

17. Scales Scale: the size of a firm or production unit. Not these:

18. Returns to scale Economies of scale: lower average cost with greater scale. Diseconomies: greater average cost with greater scale. Constant returns to scale: no change in AC when scale increases.

19. Short and long-run costs Short-run cost curves are above and tangent to the long-run curve.