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THE COST OF PRODUCTION - Coggle Diagram
THE COST OF PRODUCTION
Law of supply
Firms are willing to produce & sell a greater Q of a good when the P of the good is high
SS curve slopes upward
The firm's objective is to maximize profits
TR = P x Q
The amount a firm receives for the sale of its output
TC = TFC + TVC
The market value of the inputs a firm uses in production
Profit = TR - TC
What are costs?
Costs as opportunity costs
The cost of something is what you give up to get it
Firm's cost of production
All opportunity costs
Making its output of goods & services
Explicit costs
Require an outlay of money
Paying wages to workers
Implicit costs
Don't require a cash outlay
The opportunity cost of the owner's time
Economic profit = TR - TC
Including both explicit & implicit costs
When TC exceeds both explicit & implicit costs
< than accounting profit
Accounting profit = TR - total explicit cost
The production function
The relationship btw Q of inputs used to make a good & the Q of output of that good
Marginal product
The increase in output that arises from an additional unit of that input
Diminishing marginal product
The property whereby the marginal product of an input declines as the Q of the input increases
The slope of the production function measures the marginal product of an input
When the marginal product declines, the production function becomes flatter
Various measures of cost
Fixed costs
Don't vary with the Q of output produced
Variables costs
Vary with the Q of output produced
AFC
FC/Q
AVC
Variable cost/Q
TC = TFC + TVC
ATC = TC/Q
ATC = AFC + AVC
U shaped curve
Start rising when AVC rise substantially
The bott of the U shaped ATC curve occurs at the Q that min ATC
Efficient scale
Q that minimizes ATC
MC is the increase in TC from producing 1 more unit
MC = Change in TC/Change in Q
Think at the margin
Rise with amount of output produced
MC < than ATC, ATC fall
MC > than ATC, ATC rise
MC curve crosses ATC curve at the efficient scale
Costs in the short run & long run
Short run
Some inputs are fixed
Fixed costs
Long run
All inputs are variables
ATC at any Q is cost per unit using most efficient mix of inputs for that
How ATC changes as the scale of production changes
Eco of scale
Increase production allows greater specialization
More common when Q is low
Property whereby long-run ATC falls as the Q increase
Diseco of scale
Due to coordination prob in large organizations
More common when Q is high
Property whereby long-run ATC rise as the Q increase
Constant returns to scale refers to property whereby long-run ATC stays the = as the Q increase