This chapter discusses many types of costs: opportunity...

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: a. What you give up in taking some action is called the ______. b. _____ is falling when marginal cost is below it and rising when marginal cost is above it. c. A cost that does not depend on the quantity produced is a(n) ______. d. In the ice-cream industry in the short run, ______ includes the cost of cream and sugar but not the cost of the factory. e. Profits equal total revenue minus ______. f. The cost of producing an extra unit of output is the ______.

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:
a. What you give up in taking some action is called the ______.
b. _____ is falling when marginal cost is below it and rising when marginal cost is above it.
c. A cost that does not depend on the quantity produced is a(n) ______.
d. In the ice-cream industry in the short run, ______ includes the cost of cream and sugar but not the cost of the factory.
e. Profits equal total revenue minus ______.
f. The cost of producing an extra unit of output is the ______.

Key Concepts

Total Cost

Total cost is the sum of all costs incurred in production, combining both fixed and variable costs. It provides a comprehensive measure of the expenditure required to produce a certain level of output and is used to analyze profitability.

Opportunity Cost

This concept represents the value of the next best alternative that is forgone when a decision is made. It is a fundamental principle in economics used to ensure that scarce resources are used efficiently, by always considering what is sacrificed when choosing one option over another.

Average Total Cost

Average total cost is derived by dividing the total cost of production by the number of units produced. It reflects the cost per unit of output and is crucial for determining pricing strategies and overall efficiency of production.

Fixed Cost

Fixed costs are expenses that do not change with the level of output. They are incurred even when production is zero, such as rent or salaries, and must be paid regardless of how much or how little is produced.

Variable Cost

Variable costs fluctuate with production levels and include expenses like raw materials and labor directly tied to output. These costs increase as more units are produced and are essential for understanding cost behavior in the short run.

Marginal Cost

Marginal cost defines the additional cost incurred by producing one extra unit of output. It is key for decision-making regarding production levels, as it helps determine the point at which increasing production ceases to be beneficial.

Transcript

00:01 In this example, we are going over the number of different costs that are associated with production.

00:06 They consist of opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost.

00:13 And we have parts a through f here in which we want to identify which cost it is describing.

00:18 So starting with part a, we have what is given up to do something.

00:22 And the cost of doing one thing over the other is known as our opportunity cost.

00:33 Now part b here is saying that this cost falls when marginal cost is below it and it would rise when marginal cost is above it.

00:42 And for this one, this is known as our average cost.

00:48 And it makes sense intuitively because our marginal cost, when that goes up, so when one of our cost is increasing, we could expect that the average of our cost should also increase.

00:57 And when that marginal cost is falling, so one of those aspects is falling, we should also expect our average cost to fall with it.

01:05 Now part c here is the saying that this cost is independent of the quantity produced.

01:10 So for this one, this would be known as our fixed cost.

01:13 And the fixed cost is something that we spend money on regardless of if we produce anything or not.

01:18 So it's that cost of producing zero units essentially.

01:22 And every other cost kind of adds on top of that.

01:24 So that fixed cost could be things like the cost of purchasing our factory, right? we buy that factory.

01:30 It's a fixed cost and that's not going to change over time...

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