Chapter 13: The Costs of Production

This chapter mainly focuses on how producers decide whether or not producing an item is convenient.  It talks about how an accountant and an economist view profit differently. For example, an accountant only counts the explicit costs whereas an economist considers both the explicit and implicit costs in order to decide whether or not profit is worth investing. The chapter defines total revenue as the amount a firm receives for the sale of an output. The total cost is the market value of the inputs a firm uses in production. The profit is the total revenue minus the total cost. An economic profit is the total revenue minus total cost, including both explicit and implicit costs. Accounting profit is total revenue minus total explicit cost. A production function is the relationship between quantity of inputs used to make a good and the quantity of output of that good. Marginal products are the increase in output that arises from an additional unit of input. The diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of an input increases. The chapter talks about fixed costs which are the costs that do not vary with the quantity of output produced. An example of this would be rent. Variable costs are the costs that do vary with the quantity of output produced. An example would be the water and gas bills which vary depending on how much of the supply is being used.