FIGURE 7.6

7.3 Costs in the Short Run

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Understand the relationship between production and costs

• Understand that every factor of production has a corresponding factor price

• Analyze short-run costs in terms of total cost, fixed cost, variable cost, marginal cost, and average cost

• Calculate average profit

• Evaluate patterns of costs to determine potential profit

We’ve explained that a firm’s total costs depend on the quantities of inputs the firm uses to produce its output

and the cost of those inputs to the firm. The firm’s production function tells us how much output the firm will

produce with given amounts of inputs. However, if we think about that backwards, it tells us how many inputs

the firm needs to produce a given quantity of output, which is the first thing we need to determine total cost.

Let’s move to the second factor we need to determine.
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