CHAPTER • The Cost of Production 269 Detroit Edison [SCI = -0.004], Duke Power [SCI = -0.012], Commonwealth Edison [SCI = -0.014], and Southern [SCI = -0.028].) Thus, unexploited scale economies were much smaller in 1970 than in 1955 This cost function analysis makes it clear that the decline in the cost of producing electric power cannot be explained by the ability of larger firms to take advantage of economies of scale Rather, improvements in technology unrelated to the scale of the firms’ operation and the decline in the real cost of energy inputs, such as coal and oil, are important reasons for the lower costs The tendency toward lower average cost reflecting a movement to the right along an average cost curve is minimal compared with the effect of technological improvement Average cost (dollars per 1000 6.5 kwh) 6.0 1955 A 5.5 5.0 1970 12 18 24 30 36 Output (billion kwh) F IGURE 7.17 AVERAGE COST OF PRODUCTION IN THE ELECTRIC POWER INDUSTRY The average cost of electric power in 1955 achieved a minimum at approximately 20 billion kilowatt-hours By 1970 the average cost of production had fallen sharply and achieved a minimum at an output of more than 33 billion kilowatt-hours SUMMARY Managers, investors, and economists must take into account the opportunity cost associated with the use of a firm’s resources: the cost associated with the opportunities forgone when the firm uses its resources in its next best alternative Economic cost is the cost to a firm of utilizing economic resources in production While economic cost and opportunity cost are identical concepts, opportunity cost is particularly useful in situations when alternatives that are forgone not reflect monetary outlays A sunk cost is an expenditure that has been made and cannot be recovered After it has been incurred, it should be ignored when making future economic decisions Because an expenditure that is sunk has no alternative use, its opportunity cost is zero In the short run, one or more of a firm’s inputs are fixed Total cost can be divided into fixed cost and variable cost A firm’s marginal cost is the additional variable cost associated with each additional unit of output The average variable cost is the total variable cost divided by the number of units of output In the short run, when not all inputs are variable, the presence of diminishing returns determines the shape of the cost curves In particular, there is an inverse