Production Function and Costs

Lesson 4.54 4.55

The Production Function (54)• The Production

Function is the relationship between inputs to a business and outputs.

• Inputs and Outputs– Fixed Inputs– Variable Inputs– Long Run– Short Run

• Total Product Curve– Marginal Product of

Labor– Diminishing Returns

Diminishing Returns

Firm Costs (55)

• From the Production Function to Cost Curves– Fixed Costs– Variable Costs– Total Cost

Marginal Cost• Marginal Cost

– Cost of making the next item– MC=Change in Total Cost/Change in Quantity of Output

Figure 55.2 Total Cost and Marginal Cost Curves for Selena’s Gourmet SalsasRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Average Cost• Average Cost

– Average Fixed Cost (AFC)

– Average Variable Cost (AVC)

– Average Total Cost (ATC)

– Minimum Average Total Cost (M)

– Marginal Cost (MC) and ATC