Lecture Notes: Chapter 10 – Output and Costs
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
Understanding how firms produce goods and services, and the costs involved in doing so, is
crucial for analyzing firm behavior in both the short run and long run. Chapter 10 explores the
economic and accounting definitions of cost and profit, how output changes with variable
inputs in the short run, how to derive and interpret short-run cost curves, and how a firm’s
flexibility in the long run shapes its average costs. By the end of this chapter, you will
understand how businesses make cost-effective production decisions.
1. Economic vs. Accounting Costs and Profit
Accounting Costs and Profit
Accounting cost includes all explicit costs—actual payments made by the firm (e.g., wages,
rent, materials).
Accounting profit is calculated as:
Example:
A bakery earns $150,000 in revenue. It pays $80,000 in wages, $20,000 in rent, and $10,000 in
ingredient costs.
Economic Costs and Profit
Economic cost includes both explicit costs and implicit costs—the opportunity costs of using
resources the firm already owns.
Implicit costs might include:
The owner’s forgone salary
The rental income the firm could have earned on a building it owns
Interest that could have been earned on invested capital
, Example Continued:
If the bakery owner could earn $30,000 working elsewhere, and the building used could be
rented out for $10,000:
Economic profit of zero means the firm is doing as well as its next best alternative—not
necessarily bad news.
2. The Firm’s Short-Run Product Curves
The short run is a period in which at least one input is fixed (usually capital), and firms can
only adjust labor.
Key Product Concepts
Total Product (TP): Total output produced by a given amount of labor.
Marginal Product (MP): Additional output from one more unit of labor.
Average Product (AP): Output per unit of labor.
Graph Description – Product Curves
X-axis: Quantity of labor
Y-axis: Output (Total Product, Marginal Product, or Average Product)
1. Total Product Curve: Initially increases at an increasing rate, then at a decreasing rate.
2. Marginal Product Curve: Rises initially, then falls due to law of diminishing returns.
3. Average Product Curve: Rises and then falls; intersects MP at its maximum.
Example:
A fast-food restaurant can hire more cooks, but its kitchen size is fixed. Adding a few workers
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
Understanding how firms produce goods and services, and the costs involved in doing so, is
crucial for analyzing firm behavior in both the short run and long run. Chapter 10 explores the
economic and accounting definitions of cost and profit, how output changes with variable
inputs in the short run, how to derive and interpret short-run cost curves, and how a firm’s
flexibility in the long run shapes its average costs. By the end of this chapter, you will
understand how businesses make cost-effective production decisions.
1. Economic vs. Accounting Costs and Profit
Accounting Costs and Profit
Accounting cost includes all explicit costs—actual payments made by the firm (e.g., wages,
rent, materials).
Accounting profit is calculated as:
Example:
A bakery earns $150,000 in revenue. It pays $80,000 in wages, $20,000 in rent, and $10,000 in
ingredient costs.
Economic Costs and Profit
Economic cost includes both explicit costs and implicit costs—the opportunity costs of using
resources the firm already owns.
Implicit costs might include:
The owner’s forgone salary
The rental income the firm could have earned on a building it owns
Interest that could have been earned on invested capital
, Example Continued:
If the bakery owner could earn $30,000 working elsewhere, and the building used could be
rented out for $10,000:
Economic profit of zero means the firm is doing as well as its next best alternative—not
necessarily bad news.
2. The Firm’s Short-Run Product Curves
The short run is a period in which at least one input is fixed (usually capital), and firms can
only adjust labor.
Key Product Concepts
Total Product (TP): Total output produced by a given amount of labor.
Marginal Product (MP): Additional output from one more unit of labor.
Average Product (AP): Output per unit of labor.
Graph Description – Product Curves
X-axis: Quantity of labor
Y-axis: Output (Total Product, Marginal Product, or Average Product)
1. Total Product Curve: Initially increases at an increasing rate, then at a decreasing rate.
2. Marginal Product Curve: Rises initially, then falls due to law of diminishing returns.
3. Average Product Curve: Rises and then falls; intersects MP at its maximum.
Example:
A fast-food restaurant can hire more cooks, but its kitchen size is fixed. Adding a few workers
