production for a given quantity of output is the sum of the amount of each input required to produce that

quantity of output times the associated factor payment.

In a short-run perspective, we can divide a firm’s total costs into fixed costs, which a firm must incur before

producing any output, and variable costs, which the firm incurs in the act of producing. Fixed costs are sunk

costs; that is, because they are in the past and the firm cannot alter them, they should play no role in economic

decisions about future production or pricing. Variable costs typically show diminishing marginal returns, so
that the marginal cost of producing higher levels of output rises.

We calculate marginal cost by taking the change in total cost (or the change in variable cost, which will be the

same thing) and dividing it by the change in output, for each possible change in output. Marginal costs are
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