Chapter 11: The Firm: Production and Costs
owned resources in determining economic profit is to ask them how to calculate the profit of a farmer who
2. A good classroom illustration of implicit versus explicit costs is to ask students whether it is cheaper to
3. To reinforce correct student application of opportunity cost, make sure students recognize that the
lowest opportunity cost mode of travel is a function of the value of time. For some with very high time
values, the fastest way is frequently the lowest cost way, even if the dollar price is very expensive.
4. Another good illustration of opportunity cost is to compare the opportunity cost of a draft (where the
cost is largely borne by the draftee in below opportunity cost wages) versus the opportunity cost of an all
5. Make sure students avoid a very common error, by recognizing that a firm could earn zero economic
6. A good illustration of sunk costs is guilt. If someone feels guilty, and that guilt leads them to change
7. A close to home illustration of sunk costs is the cost of a student attending or skipping class. Once the
8. Give students several examples
9. A useful example for discussing production functions, fixed and variable factors, etc., is to talk about
production functions for grades in the course. You can talk about varying the proportions of different
inputs (e.g., time in class versus time studying at home, study guides, tutors, etc.); about increasing and
10. Emphasize to students that there are many different costs that are fixed over different periods of time,
so that there can be several different short runs for different decisions.
11. Students sometimes claim that they studied more and got a lower grade (implying that they studied
12. Do more than one simple in-class illustration of the intuition of a production function. For example, in
a factory with 100 machines, up to 100 workers, some workers will have to move between multiple
13. Do a brief numerical illustration connecting marginal product and marginal cost to reinforce student
understanding. Even something as simple as calculating marginal cost when the wage equals $10 an
hour, and marginal product is first 20; then 30; then 10; can help some math-phobic students.
14. Make sure students understand the important graphical relations, as we will later presume students
15. Emphasize that the long run can best be thought of as dealing with a point in time prior to a firm
16. The question of how many firms there would be in an industry and how large they would be should be
related to whether there are economies of scale, diseconomies of scale, or constant returns to scale in
the industry.
17. Food courts (rather than stand alone restaurants) in shopping malls are good, familiar examples of
economies of scale.
18. At one time in California, when they had just added large amounts of new electrical generating
uld
19. A good historical illustration of economies of scale is when railroads dramatically lowered
20. Another good illustration of economies of scale is highway lanes. As you go from 1 to 2 lanes in each
21. Note that the long run average cost curve we are discussing does not consider such further questions