• <b>Federal Trade Commission</b>

Principles of Microeconomics


Cost of Production


This topic covers the costs of production. In particular, the relationship between costs and production are covered, along with details about production and cost functions. While a detailed analysis of the costs of production is not necessary an exciting endeavor, it is imperative to understand these costs in order to understand different market structures (e.g., the number of firms in the market). The Pencasts for this topic cover the following more specific areas of production and costs: short-run production, different short-run cost measures, how the production function and total cost curve are mirror images of one another, the relationship between different short-run cost curves, how per-unit taxes affect a representative firm’s short-run cost curves, how a lump-sum tax affects a representative firm’s short-run cost curves, and how to construct a firm’s long-run cost curve.


[Download PDF]

Short-run Production

This Pencast discusses short-run production, which involves varying one input while holding other inputs fixed. In this case, labor is assumed to be variable and capital is assumed to be fixed. The Pencast illustrates how to plot the production function and its slope, which is the marginal product of labor (MPL). The Pencast also explains the shapes for the plots of the production function and the MPL curve. [Play Pencast]


[Download PDF]

Short-run Cost Measures

This Pencast defines different short-run cost measures, including fixed cost, variable cost, total cost, and marginal cost. It also shows how to plot the fixed cost, variable cost and total cost curves. [Play Pencast]


[Download PDF]

Production and Costs Relationship

This Pencast explains and illustrates the relationship between the production function and the total cost curves. In particular, the Pencast illustrates how the production function and the total cost curve are mirror images of one another. Furthermore, it illustrates how the marginal cost curve and the marginal product of labor curves, which are the first derivatives of the total cost curve and the production function, respectively, are also mirror images of one another. [Play Pencast]


[Download PDF]

Average Fixed Cost

This Pencast shows how to pot the average fixed cost curve using a numerical example. [Play Pencast]


[Download PDF]

Average Variable Cost

This Pencast shows how to plot the average variable cost curve. Furthermore, it explains how the average variable cost curve gets its U-shaped pattern. [Play Pencast]


[Download PDF]

Average Total Cost

This Pencast shows how to plot the average total cost curve. Futhermore, the Pencast provides the intuition behind the average total cost curve’s U-shaped pattern. [Play Pencast]


[Download PDF]

Short-Run Cost Curves

This Pencast puts all the short-term cost measures, average fixed cost, average variable cost, average total cost and marginal cost, together in one graph. It also describes how the different cost measures are related to one another. [Play Pencast]


[Download PDF]

Per-Unit Taxes and Short-Run Costs

This Pencast shows how the short-run cost curves are affected when the government levies a per-unit tax. It explains that per-unit taxes represent variable costs, which implies that only certain short-run cost curves are affected by the government policy. [Play Pencast]


[Download PDF]

Lump-Sum Taxes and Short-Run Costs

This Pencast shows the short-run cost curves are affected when the government levies a lump-sum tax, which is a flat fee that must be paid by firms. It explains that a lump-sum tax only affects certain short-run cost curves. In particular, only cost curves with a "fixed" component will shift. [Play Pencast]


[Download PDF]

Long-Run Costs

This Pencast illustrates a firm's long-run costs, with emphasis on both inputs (i.e. capital and labor) becoming variable. It demonstrates how an increase in output means higher costs in the short run but lower costs in the long run. The Pencast also introduces the concepts of economies of scale, constant returns to scale and diseconomies of scale. [Play Pencast]


Return to Principles of Microeconomics Home