Economics, 3rd Edition

THE VARIOUS MEASURES OF COST

Our analysis of Paolo’s Pizza Factory demonstrate 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 to help in analysing pro-

duction and pricing decisions. Consider the example in Table 6.2. This table presents cost data on Paolo’s 

neighbour: Luciano’s Lemonade Stand.

The first column of the table shows the number of glasses of lemonade that Luciano might produce, 

ranging from 0 to 10 glasses per hour. The second column shows Luciano’s total cost of producing glasses 

of lemonade. Figure 6.2 plots Luciano’s total cost curve. The quantity of lemonade (from the first column) 

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CHAPTER 6  BACKGROUND TO SUPPLY: FIRMS IN COMPETITIVE MARKETS  139

is on the horizontal axis, and total cost (from the second column) is on the vertical axis. Luciano’s total 

cost curve has a shape similar to Paolo’s. In particular, it becomes steeper as the quantity produced rises, 

which (as we have discussed) reflects diminishing marginal product.