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Costs of Production
All opportunity costs of making output
Costs that involve actually laying out money
costs of inputs that have no direct money payment. (Salary of owner, Investment, Rent.)
Total Revenue minus explicit costs (plus allowance for depreciation).
Total revenue minus implicit and explicit costs, usually lower than accounting profit.
Implicit Cost of Capital
(normal profit) the opportunity cost of capital (what the could have earned with the next best alternative).
When is economic profit negative?
If an owner'a implicit costs are greater than the accounting profit of the firm, the economic profit will be negative.
- A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.
- The purpose is ti tell how much output can be produced by varying amounts of input.
the process of turning inputs into outputs
Factors of production
- resourse inputs used to produce goods
an input whose quantity can be changed (usually labor, material, etc.)
a input whose quantity can not be changed in the given time period (usually capital, plant size)
- The period in which the quantity (and quality) of some inputs cannot be changed.
- Some inputs are so costly to adjust that they are treated as fixed.
- labor can change while capital is held constant in the short-run.
- Labor is the variable input that determines how much output we get from our fixed inputs (land and capital).
Time period in which all inputs can be changed
total product curve
shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
Marginal product (MP) -
The change in total output that results from employment of one additional unit of input
Law of Diminishing Product:
- The marginal product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs.
- As more labor is hired, each unit of labor has less capital and land to work with.
- The slope of the production function measures marginal product.
- Diminishing marginal product can be seen from the fact that the slope falls as the amount of labor used increases.
- are the most likely basis of production decision, not technical notions of things like MP.
- The dollar costs, however, are directly related to the underlying production function.
Fixed Costs -
- costs of production that do not change when the rate of output is altered.
- The cost related to the fixed input (i.e., the cost of basic plant and equipment. )
- There is no way to avoid fixed costs in the short run
Costs of production that change when the rate of output is altered. The cost of the variable inputs (i.e., labor and material costs).
- the market value of all the resources used to produce a good or service.
- How fast total costs rise depends on variable costs only (since fixed costs don't change).
- Average Costs
- Marginal Costs
Law of Diminishing Product
The marginal product of a variable