ABSTRACT
This chapter aims to develop the mainstream economics theory of the firm involving models of firms’ short-run and long-run costs and their optimizing behavior. It explains the shape of the marginal cost curve and how it relates to the marginal product of labor and the laws of specialization and diminishing returns. The chapter describes the relationship between the marginal cost curve and the average variable cost curve and the shape of the average total cost curve from the marginal cost, average variable cost, and average fixed cost curves. Given information for a firm on total fixed cost and total variable cost at various quantities, compute marginal cost, average variable cost, average fixed cost, and average total cost. The chapter examines the concepts of economies of scale and diseconomies of scale to particular industries using the long-run average total cost curve. The chapter also aims to compare and contrast the mainstream economics theory of the firm with the political economy theory of the firm.
