1. COST OF PRODUCTION
The cost-of-productiontheoryof value isthe theorythatthe price of an objector conditionis
determinedbythe sumof the cost of the resourcesthat wentintomakingit.The cost can comprise any
of the factorsof production (includinglabor,capital,orland) and taxation.
TYPES OF COST
Fixedcosts are expensesthatdonotchange inproportiontothe activityof a business, withinthe
relevantperiodorscale of production.Forexample,aretailermustpayrentand utilitybillsirrespective
of sales.
Variable costs by contrast change inrelationtothe activityof a businesssuchassalesorproduction
volume.
Average cost isequal tototal cost dividedbythe numberof goodsproduced.
Marginal cost is the change intotal cost thatarises whenthe quantityproducedchangesbyone unit.In
general terms,marginal costat eachlevel of productionincludesanyadditional costsrequiredto
produce the nextunit.So,the marginal costsinvolvedinmakingone more woodentable are the
additional materialsand laborcostincurred.
Sunk costs are those that cannot be recoveredif afirmgoesout of business.
AVERAGE COST (EXPLAIN)
Average costor unitcost is equal to total cost dividedbythe numberof goodsproduced(the output
quantity,Q).Itis alsoequal tothe sumof average variable costs(total variablecosts dividedbyQ) plus
average fixed costs(total fixedcosts dividedbyQ).Average costsmaybe dependentonthe time period
considered(increasingproductionmaybe expensiveorimpossible inthe shortterm, forexample).
Average costsaffectthe supplycurve andare a fundamental componentof supplyand demand.
Short-run average cost will varyinrelationtothe quantityproducedunlessfixedcostsare zeroand
variable costsconstant.A cost curve can be plotted,withcostonthe y-axisandquantityonthe x-axis.
Long-run average cost
The long runis a time frame inwhichthe firmcan vary the quantitiesusedof all inputs,evenphysical
capital. A long-runaverage costcurve can be upwardsloping,downwardsloping,ordownwardsloping
at relativelylow levelsof outputandupwardslopingatrelativelyhighlevelsof output,withanin-
betweenlevelof outputatwhichthe slope of long-runaverage costiszero.The typical long-runaverage

2. cost curve is U-shaped,bydefinitionreflectingincreasingreturnstoscale where negativelyslopedand
decreasingreturnstoscale where positivelysloped.
SHORT RUN
All productioninreal time occursinthe shortrun. The short run isthe conceptual time periodinwhich
at leastone factor of production isfixedinamountandothersare variable inamount.Coststhat are
fixed,sayfromexistingplantsize,have noimpactona firm'sshort-rundecisions, since onlyvariable
costs andrevenuesaffectshort-runprofits.
LONG RUN
The long run is the conceptual time periodinwhichthere are no fixedfactorsof production asto
changingthe outputlevel bychangingthe capital stock or by enteringorleavinganindustry. The long
run contrastswiththe short run,in whichsome factorsare variable andothersare fixed,constraining
entryor exitfroman industry. The longrunis the periodwhenthe general price level,contractual wage
rates,and expectationsadjustfullytothe state of the economy,incontrast to the shortrun whenthese
variablesmaynotfullyadjust