Principles economics cost of production
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Transcript of Principles economics cost of production
The Meaning of the Cost• A firm’s cost of production includes all the
opportunity costs of making its output of goods and services
• Economic Cost or Opportunity Cost– Forgoing the opportunity to produce
alternative goods and services.• Explicit Cost
– Accounting cost or money outlay.• Implicit Cost
– Cost measured by the value of alternative given up.
Economic Profit versus Accounting Profit• Your Economists measure a firm’s economic
profit as total revenue minus total cost, including both explicit and implicit costs.
• Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs.
• When total revenue exceeds both explicit and implicit costs, the firm earns economic profit.– Economic profit is smaller than accounting profit
Opportunity Cost and Normal Profit• Normal Profit
– Opportunity cost of capital and enterprise.– This is the level of profit that is necessary for a firm to
remain in a competitive industry.
The Use of Accounting Profits and Economic Analysis
Accounting Profit Implicit Cost(Including Normal
Profit)
Accounting Costs = Explicit Costs
Accounting Costs = Explicit Costs
Economic Profit
Economic Cost = Implicit Cost + Accounting Cost
Total Revenue
Cost In The SHORT TERM• Short Term - one year or less, often used to
refer to bonds or loans.
• Long Term - long period of time, as for a bond (10 or more years) or for a buy and hold investment strategy.
Cost Defined• Total Cost (TC)
– The sum of all the cost of production for a given level of output.
• Total Fixed Cost (TFC)– The cost of the fixed factors of production. Total fixed
cost does not vary in the short run.
• Total Variable Cost (TVC)– Total of cost that vary directly with output, increasing
as more output is produced.
Cost Defined• Average Total Cost (AC)
– Total costs of production divided by the number units of output.
AC = TC Q
• Average Fixed Cost (AFC)– Total fixed costs of production divided by output.
Average fixed costs decline as production is increased.
• Average Variable Cost (AVC)– Total variable cost divided by the number of units of out
put.
Cost Defined• Marginal Cost (MC)
– Change in total cost from producing some more (or less) unit output.
∆ MC =
Cost Curves• Co
The Relationship Between Product Curves And Cost Curves
Alternative Plant Sizes
Long run Average Cost Curve
Economies and Diseconomies of Scale
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