Principles economics cost of production

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Principles economics cost of production

  1. 1. 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.
  2. 2. 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
  3. 3. 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.
  4. 4. 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
  5. 5. 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.
  6. 6. 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.
  7. 7. 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.
  8. 8. Cost Defined • Marginal Cost (MC) – Change in total cost from producing some more (or less) unit output. ∆ MC =
  9. 9. Cost Curves • Co
  10. 10. The Relationship Between Product Curves And Cost Curves
  11. 11. Alternative Plant Sizes
  12. 12. Long run Average Cost Curve
  13. 13. Economies and Diseconomies of Scale
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