Learning ObjectivesAFTER READING TH

Learning Objectives

AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

Differentiate economic profit from accounting profit.


Distinguish between long-run and short-run production.


State the law of diminishing marginal productivity.


Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs, given the appropriate information.


Distinguish the various kinds of cost curves and describe the relationships among them.


Explain why average cost curves are U-shaped.
Chapter Summary

When analyzing firm behavior, one needs to distinguish the short run from the long run. This chapter focuses on short run decisions by a firm. Knowledge of costs of production, and how they vary with the production level, in both the short run and the long run, is prerequisite to maximizing profits. Profit for a firm equals total revenue minus total costs, and there is a difference between accounting and economic profit.

Almost all costs of production in the short run vary with the production level as a result of the law of diminishing marginal productivity. There are seven short run costs: total fixed costs, total variable costs, total costs, marginal costs, average fixed costs, average variable costs, and average total costs. This chapter emphasizes the relationship between these costs.

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