What’s in This Chapter?

One of a firm’s objectives is to keep costs to a minimum and thus increasing a firm’s profits. This unit analyzes a firm’s costs of production. A firm’s fixed costs include its expenses on fixed inputs, such as land and machinery. Variable costs include expenses on variable inputs, such as labor and materials. Total cost equals total fixed costs plus total variable costs.

Cost can also be expressed per unit: average fixed cost, average variable cost, average total cost, and marginal cost. As quantity produced increases, average variable, average total, and marginal cost eventually increase in the short run, because of diminishing returns. Long-run average cost for a typical firm decreases as output increases, due to economies of scale. It then increases as output continues to increase, due to diseconomies of scale.

We also distinguish between explicit costs and implicit costs. The calculations of all these costs are explained in this unit.