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Cost of production - Coggle Diagram
Cost of production
COSTS?
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Explicit vs. Implicit
Explicit costs require an outlay of money, e.g., paying wages to workers.
Implicit costs do not require a cash outlay, e.g., the opportunity cost of the owner’s time.
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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.
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PRODUCTION AND COSTS
The Production Function
The production function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.
Diminishing Marginal Product is the property whereby the marginal product of an input declines as the quantity of the input increases.
Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.
The slope of the production function measures the marginal product of an input, such as a worker.
When the marginal product declines, the production function becomes flatter.
Marginal Product
The marginal product of any input in the production process is the increase in output that arises from an additional unit of that input.
The relationship between the quantity a firm can produce and its costs determines pricing decisions.
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