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The costs of production. Income from factors of production Sws

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Content

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Economic Costs The payment that must be made to obtain and retain the services of a resource Explicit Costs Monetary payments Implicit Costs Value of next best use Self-owned resources Includes normal profit

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Accounting Profit and Normal Profit Accounting profit = Revenue – Explicit Costs Economic profit = Accounting Profit – Implicit Costs Economic profit (to summarize) =Total Revenue – Economic Costs =Total Revenue – Explicit Costs – Implicit Costs

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Economic Profit

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Short Run and Long Run Short Run Some variable inputs Fixed plant Long Run All inputs are variable Variable plant Firms enter and exit

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The Law of Diminishing Returns

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Short-Run Production Relationships Total Product (TP) Marginal Product (MP) Average Product (AP)

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Short-Run Production Costs Fixed Costs (TFC) Costs do not vary with output Variable Costs (TVC) Costs vary with output Total Costs (TC) Sum of TFC and TVC TC = TFC + TVC

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Short-Run Production Costs

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Long-Run Production Costs The firm can change all input amounts, including plant size. All costs are variable in the long run. Long run ATC Different short run ATCs

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The Long-Run Cost Curve

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Per-Unit, or Average, Costs Average Fixed Costs AFC = TFC/Q Average Variable Costs AVC = TVC/Q Average Total Costs ATC = TC/Q Marginal Costs MC = ΔTC/ΔQ

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Per-Unit, or Average, Costs

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Economies and Diseconomies of Scale Economies of scale Labor specialization Managerial specialization Efficient capital Other factors Constant returns to scale

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Economies and Diseconomies of Scale Diseconomies of scale Control and coordination problems Communication problems Worker alienation Shirking

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Conclusion The costs related to making or acquiring goods and services that directly generates revenue for a firm. It comprises of direct costs and indirect costs. Direct costs are those that are traceable to the creation of a product and include costs for materials and labor whereas indirect costs refer to those costs that cannot be traced to the product such as overhead.