Chapter 7: Production Costs

LEARNING OBJECTIVES
The steps to achieve the learning objectives include reading sections from your textbook and the
causation chain game, which is available directly on the Tucker web site. The steps also include
references to Ask the Instructor Video Clips, the Graphing Workshop available through
CourseMate on the Tucker website.
#1- Distinguish between explicit and implicit costs and between accounting and economic profit.
Step 1

Read the section in your textbook titled Costs and Profit.

Step 2

Listen to Ask the Instructor Video Clip titled Why Do Economists and Accountants
Disagree? You will learn the difference between accounting profits and economic
profits for an ice cream shop.

The Result

After following these steps, you have learned that explicit costs are the payments to
nonowners reported by accountants. Implicit costs are opportunity costs (forgone
earnings) of using resources owned by the firm. Accounting profits are total revenues
minus explicit costs, but economic profits are total revenue minus both explicit and
implicit costs. Economic profits are important for a complete analysis of profits or losses
of a firm.

#2 - Understand the difference between a short-run and long-run production function and explain
the law of diminishing returns.
Step 1

Read the section in your textbook titled Short-Run Production Costs.

Step 2

Watch the Graphing Workshop See It! tutorial titled Production in the Short-Run.
Study the production function for tons of furniture moved per day.

The Result

Following these steps, you have learned that in the short run at least one input is fixed,
and all inputs are variable in the long run. The production function relates maximum
output to various quantities of the variable input. And the law of diminishing returns
determines that beyond some point, the change in total output (marginal product)
decreases causing the total output curve to increase at a decreasing rate.

#3 - Define the different cost concepts and express them graphically.

Step1

Read the sections in your textbook titled Short-Run Cost Formulas, Marginal Cost
Relationships, Long-Run Production Costs, and Different Scales of Production.

*Step 2

Watch the Graphing Workshop See It! tutorial titled Production and Cost. Study the
relationship between the various measures of cost and bags of pretzels per day.

Step 3

Real the Graphing Workshop Grasp It! exercise titled Production and Cost. This
exercise uses a slider bar to demonstrate the average costs and marginal cost for a firm.

Step 4

Create a new graph at the Graphing Workshop Try It! exercise titled Production and
Cost. This exercise illustrates the relationship between quantity and a firms short-run
total cost curves.

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Step 5

Play the Causation Chains Game titled Marginal Products Effects on Marginal
Cost.

Step 6

Listen to the Ask the Instructor Video Clip titled What Do We Mean by Fixed Versus
Variable Costs? You will study a wheat and a university to illustrate the difference
between fixed and variable costs in the short run and long run.

The Result

Following these steps, you have learned to graph the total, average, and marginal cost
concepts. And you learned to distinguish between short and long run costs.

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