1. The Cost Curve Model
Chapter 13
Cost Curves

2. Review: The Production FunctionTP MP AP
(total output)
Law of diminishing
Marginal product
(average output
Per-worker)
Shape of product curves will determine shape of costs curves
(marginal output
Next worker)

3. Opportunity Costs
A firm’s cost curves must include all opportunity costs
Both explicit & implicit
Explicit costs- input costs that require a direct outlay of money
Example: attending college => tuition, books, etc….
Implicit costs- input costs that do not require an outlay of money
Example: attending college => can’t work (loss of income)

4. Economic Profit vs. Accounting Profit
Economic profit = total revenue - total costs
both explicit & implicit costs
Accounting profit = total revenue - explicit costs
no implicit costs!
Economic profit is smaller than accounting profit
Firms maximize economic profit
All cost curves include both implicit & explicit costs

5. Economists vs. Accountants
How an Economist
How an Accountant
Views a Firm
Views a Firm
Total
Revenue
$1,000
Economic
Profit
$825
1) Value of your time
2) Loss of interest
income on money invested
3) Etc….
Accounting
Profit
$900
Total
Revenue
$1,000
Implicit
Costs
$75
Total
opportunity
costs
Explicit
Costs
$100
Explicit
Costs
$100
Anything paid for
in dollars

6. Costs of Production
Fixed costs - do not change with quantity of output
Rent on factory, machinery, insurance, etc…. (they are sunk!)
Variable costs - increase with quantity of output
Cost of workers, cost of other inputs, etc…
Marginal cost increase in total cost from next unit of production
Cost to produce one additional good or service
Total Costs = Fixed Costs + Variable Costs

7. Marginal Costs (MC) = ∆ Total Cost.
Total 3 units:$4.50
Total 4 units:$5.40
MC of 4th unit = $0.90
($ $4.50 = +0.90)

8. Cost Curve Model Cost Curve Model uses average cost curves Variable
Costs
Cost Curve Model uses average cost curves
AFC = FC/Qty
AVC = VC/Qty
ATC = TC/Qty
MC = ∆ TC (for 1 more unit)
Fixed
Costs
Total
Cost

9. Worksheet: Cost Curve Model