Chapter 13 Summary

Chapter 13 examined the various costs that firms face and how those costs relate to each other. The first concept introduced in the chapter was that of fixed costs vs. variable costs. Fixed costs are those costs such as office space that do not vary with the quantity of goods produced. Variable costs are those costs that depend on the quantity produced, such as labor and physical inputs. Costs can be explicit, which means they are strictly monetary, or implicit, which implies that they are not monetary and include things such as opportunity cost. Accounting profit is total revenue minus explicit costs; however, economic profit, which accounts for opportunity costs, is in general more important to firms' decisions. Fixed costs divided by the quantity produced is average fixed cost, and, since fixed costs don't depend on quantity produced, are always decreasing. Average variable costs tend to increase because of diminishing marginal product, which is the idea that as you produce more, you eventually become less efficient. Average total cost is the sum of average fixed cost plus average variable cost, and when it is equal to marginal cost (the cost of producing 1 more unit of the good), a firm is at the efficient scale.