The Various Measures Of Cost

Our analysis of Hungry Helen's Cookie Factory demonstrated how a firm's total cost reflects its production function. From data on a firm's total cost, we can derive several related measures of cost, which will turn out to be useful when we analyze production and pricing decisions in future chapters. To see how these related measures are derived, we consider the example in Table 13-2. This table presents cost data on Helen's neighbor: Thirsty Thelma's Lemonade Stand.

The first column of the table shows the number of glasses of lemonade that Thelma might produce, ranging from 0 to 10 glasses per hour. The second column shows Thelma's total cost of producing lemonade. Figure 13-4 plots Thelma's total-cost curve. The quantity of lemonade (from the first column) is on the horizontal axis, and total cost (from the second column) is on the vertical axis. Thirsty

Figure 13-4

Thirsty Thelma's Total-Cost Curve. Here the quantity of output produced (on the horizontal axis) is from the first column in Table 13-2, and the total cost (on the vertical axis) is from the second column. As in Figure 13-3, the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product.

Total Cost

$15.00 14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00

8 9 10 Quantity of Output (glasses of lemonade per hour)
Thirsty Thelma Lemonade Stand

The Various Measures of Cost: Thirsty Thelma's Lemonade Stand

Table 13-2

The Various Measures of Cost: Thirsty Thelma's Lemonade Stand

Table 13-2

Thelma's total-cost curve has a shape similar to Hungry Helen's. In particular, it becomes steeper as the quantity produced rises, which (as we have discussed) reflects diminishing marginal product.

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