Economics: The Cost of Production

Difficulty: 2/3 (So many names for so many curves)
Review: 4/5 (Boring chapter, as Mankiw at least honestly puts it)

What are the costs for the supplier? There's profit, revenue - total cost. Total cost includes explicit costs which are direct costs that an accountant would know and implicit costs like what you could've been earning, only something an economist would take into account.

Random Fact: Industrial organization is the study of how firm's make decisions based off market conditions.

The production function graphs quantity of output in respect to number of workers and the total-cost curve graphs total cost in respect to quantity of output. The production function curves upwards steeply then more flatly because of diminishing marginal production as coordination becomes more difficult. The total cost curve curves upward slowly then steeply as marginal cost increases just as explained in production function.

There's fixed costs like rent but some costs are variable as output changes like number of workers hired or amount of supplies to make the product needed. This introduces average total cost, which includes average fixed cost and average variable cost too, each with their own unique curve on the total cost curve.

The average total cost curve is more steeply u-shaped in the short run, and is also dependent on size of the firm. In the long run, the ATC forms a very flat u-shape.

Economies of scale is when in the long run as output increases, ATC decreases, as shown with specialization. On the other hand, it is said to be diseconomies of scale if ATC increases as output increases, as shown with difficulty of coordination.

More information on the actual shapes of the curve can be found online.