Page 446 - Economics

CONFIRMING PAGES

IN THIS CHAPTER YOU WILL LEARN:
• Why economic costs include both explicit (revealed
and expressed) costs and implicit (present but not
obvious) costs.
20 • How the law of diminishing returns relates to a
firm’s short-run production costs.
• The distinctions between fixed and variable costs
and among total, average, and marginal costs.
• The link between a firm’s size and its average costs
in the long run.

The Costs of Production

Our attention now turns from the behavior of consumers to the behavior of producers. In market
economies, a wide variety of businesses produce an even wider variety of goods and services. Each of
those businesses requires economic resources in order to produce its products. In obtaining and using
resources, a firm makes monetary payments to resource owners (for example, workers) and incurs
opportunity costs when using resources it already owns (for example, entrepreneurial talent). Those
payments and opportunity costs together make up the firm’s costs of production, which we discuss in
this chapter.
Then, in the next several chapters, we bring product demand, product prices, and revenue back
into the analysis and explain how firms compare revenues and costs in determining how much to
produce. Our ultimate purpose is to show how those comparisons relate to economic efficiency.

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