Chapter 13 Journal

In this chapter, Mankiw goes more in depth in explaining the costs of production to a firm besides the basic introduction to opportunity cost, etc. that we read in earlier chapters. Mankiw explains that the ultimate goal of a firm large or small is to maximize profit. Profit is equal to total revenue minus total cost. There are two different ways to analyze profit, however. An economist analyzes not only a firm’s explicit costs, or costs that require an outlay of money from the firm, but also a firm’s implicit costs which do not require a direct outlay of money by the firm. An accountant only takes into account explicit costs. A firm’s costs directly reflect its production process, which is reflected in a graph called a production function. This function gets flatter as the quantity of an input increases. In this graph, you are able to see the diminishing marginal product, which means that the increase in an output from an additional unit of input diminishes with each additional unit. Because of this, a firm’s total-cost curve becomes steeper as they increase their quantity produced. The total cost of a firm can be divided into two categories: fixed and variable costs, Fixed costs do not change when the firm changes their quantity produced, like the cost of rent. Variable costs change when the firm alters the quantity of output produced, like the cost of supplies. Based on the total cost, you can determine the average total and marginal cost of the firm.