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# Cost of production presentation

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Micro-economics, Cost of production explained

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### Cost of production presentation

1. 1. COST of PRODUCTION Price of a good which is determined by the sum of the costs of the resources that went into making itCOST REVENUE PROFIT
2. 2. OPPORTUNITY COST The value of most appealing alternative that is not chosen is called opportunity costOpportunities 1. To work all day and make some money 2. To take the day off and go to a movie
3. 3. Opportunity cost = Explicit cost + Implicit cost Explicit Cost Implicit CostInput cost that requires an Input cost that DO NOT outlay of money requires an outlay of money
4. 4. • computer hardware,• utilities,• supplies,• property and other taxes,• maintenance costs,• payments to wholesalers,• salaries of office support staffTo open a computer software firm.Payments that must be made includeEXAMPLE ofEXPLICITCOST
5. 5. • Owner works 60 hours a week• Lease payment or rent he would otherwise receive• Could earn if invested elsewhere• Salaries they could earn if employed in another businessIf starts computer software firmin his own buildingEXAMPLE ofIMPLICITCOST
6. 6. Various Costs & their MeasurementsFixed Cost Costs that do not vary with the quantity of output produced e.g. salaries or rentsVariable Cost Costs that do vary with the quantity of output produced e.g. raw materials and additional laborsMarginal Cost The increase in total cost that arises from an additional unit of production.Average Cost How much does it cost to make a typical unit of production. Marginal cost Average Average Average Change in Fixed Variable TotalQuantity fixed variable total cost= total cost cost cost=F.C+V.C cost=FC/Q cost=VC/Q AFC+AVC cost/change in quantity0 \$3 \$0.0 \$3 --- --- --- \$0.31 3 0.3 3.3 \$3.0 \$0.30 \$3.3 0.52 3 0.8 3.8 1.5 0.40 1.9
7. 7. Explicit Cost + Implicit Cost Only Explicit CostEconomic profit is always less than the accounting profit
8. 8. Production FunctionThe relationship between quantity of input and outputMaximum output that can be produced from anycombination of inputs available in a given time periodNo. of Output Marginal Fixed cost/ Variable Total cost ofworkers/ quantity of product cost of cost/ cost of inputs=quantity cookies factory workers F.C+V.C produced/ hour0 0 \$30 \$0 \$30 \$501 50 30 10 40 402 90 30 20 50 303 120 30 30 60 204 140 30 40 70 105 150 30 50 80 56 155 30 60 90
9. 9. Comparison of TC and Production FunctionLaw of Diminishing Marginal Product The property where the marginal product of an input declines as the quantity of the input increases
10. 10. Shapes of Cost Curves & their Relationships• MC first decline then will go up, intersects AVC & ATC• AVC go down, but not as steeply as MC, then go up• AFC declines continuously• ATC initially declines as FC is spread over a larger number of units, but will go up as marginal costs increase due to the law of diminishing returns