A. ECONOMIC ANALYSIS OF COSTS

TOTAL COST: FIXED AND VARIABLE
Consider a firm that produces a quantity of output (denoted by q) using inputs of capital. labor. and materials. The firm buys these inputs in the factor markets. The firm’s accountants have the task of calculating the total dollar costs incurred to produce output level q.

Table 7-1 on page 126 shows the total cost (TC) for each different level of output q. Looking at columns (1) and ‘(4), we see that TC goes up as q goes up. This makes sense because it takes more labor and other inputs to produce more of a good; extra factors involve an extra money cost. It costs S1IO in all to produce 2 units. S 130 to produce 3 units 6 and so forth. In our discussion. we assume that the firm always produces output at the lowest possible cost.

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