PRINCIPLES OF

ECONOMICS
Chapter 13 – The Costs of Production
THE COSTS OF
PRODUCTION

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 ∆𝑄
𝑀𝑃𝐿 =
∆𝐿

Costs & Production

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 Cost of Equipment Wages
Loan Payments Cost of Materials
Rent

∆𝑻𝑪
𝑴𝑪 =
∆𝑸

Costs & Production

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Sheet 5

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 This chapter discusses many types of costs: opportunity cost, total
cost, fixed cost, variable cost, average total cost, and marginal
cost. Fill in the type of cost that best completes each sentence:

What you give up for taking some action is called the _____. OC
______ is falling when marginal cost is below it and rising when
marginal cost is above it.
ATC
Example 1 A cost that does not depend on the quantity produced is a(n)
______. FC
In the ice-cream industry in the short run, _______ includes
the cost of cream and sugar but not the cost of the factory. VC
Profits equal total revenue minus ______. TC
The cost of producing an extra unit of output is the _______. MC

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 Quantity of Marginal
Example 2 Hours
Fish (Pounds) Product
Fixed Cost Variable Cost Total Cost

0 0 --- 10 0 10
A commercial fisherman notices 1 10 10 10 5 15
2 18 8 10 10 20
the following relationship
3 24 6 10 15 25
between hours spent fishing 4 28 4 10 20 30
and the quantity of fish caught. 5 30 2 10 25 35
a. What is the marginal
product of each hour spent
fishing?
b. Use these data to graph the
fisherman’s production
function. Explain the shape.
c. The fisherman has a fixed
cost of $10 (his pole). The
opportunity cost of his time
is $5 per hour. Graph the
fisherman’s total-cost
curve. Explain its shape.
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 Example 3
You are thinking about setting
up a lemonade stand. The
stand itself costs $200. The
ingredients for each cup of Gallons Total Cost ATC MC
lemonade cost $0.50. 1 208 208 ---
a. What is your fixed cost of 2 216 108 8
3 224 74.66 8
doing business? What is
4 232 58 8
your variable cost per cup?
5 240 48 8
b. Construct a table showing 6 248 41.33 8
your total cost, average 7 256 36.5 8
total cost, and marginal 8 264 33 8
cost for output levels 9 272 30.22 8
varying from 0 to 10 10 280 28 8
gallons.
(Hint: There are 16 cups in
a gallon.) Draw the three
cost curves. M. Elnahas 2021 8
 Quantity FC VC TC AFC AVC ATC
1 200 10 210 200 10 210
Example 4 2 200 20 220 100 10 110
Your cousin Vinnie owns a painting 3 200 40 240 66.66 13.33 80
company with fixed costs of $200 4 200 80 280 50 20 70
and the following schedule for
5 200 160 360 40 32 72
variable costs:
6 200 320 520 33.33 53.33 86.66
7 200 640 840 28.57 91.43 120

FC VC TC AFC AVC ATC

900 250
Calculate average fixed cost, 800
700 200
average variable cost, and average 600
150
Cost ($)

Cost ($)
total cost for each quantity. 500
400
100
What is the efficient scale of the 300
200 50
painting company? 100
0 0
0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8
Quantity Quantity

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ANY
QUESTIONS?

THANK YOU

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