In This Chapter
Learning two different views of costs
Distinguishing average, total, and marginal costs
Connecting costs to staying in business
Much of the production in an economy comes from firms. In a market-based economy, these firms make their decisions based on an indicator, profit, which expresses the difference between the revenues the firm takes in and the costs it expends in obtaining those revenues. To understand how a firm makes such decisions, as well as how economists look at them, you need to examine more closely the relationship between the different types of cost a firm faces — what economists call its cost structure.
In a market economy, and certainly in an economically liberal society, a firm can’t simply march people to its showrooms, lock the doors, and force them to buy its product, much as they might like to. So, although a firm may know a lot about how to organize production or how to produce, it doesn’t necessarily know how much a consumer will want to buy at a given price — at least until it starts to get data from transactions. And it certainly can’t control how much people will buy at that price (though ...