Economics
Costs of Production
Costs of production refer to the expenses incurred by a firm in the process of manufacturing goods or providing services. These costs typically include expenses such as labor, raw materials, and overhead. Understanding and managing costs of production is crucial for businesses to determine pricing strategies, maximize profits, and make informed decisions about production levels.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Costs of Production"
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
5 Theory of Costs: Costs and their Behaviour Patterns A farmer employs several resources to produce the output and he tries to minimize the cost in the production programme. He takes into consideration the resources relationships in allocating them in the enterprise or among the enterprise combinations. This concept was discussed earlier through analyzing the LCC or Optimum factor combination. The other important aspect that guides the farmer to conduct the agri-business is to analyze the cost structure both in the short run and long run production programmes. We know, production is the result of resources and resource services employed in the business. The farmer has to make payments for these resources and resource services employed in the production programme. From the point of view of the factor supplier, it is called as ‘Factor income’, while from the farmer or firm point of view, it is ‘Factor payment’ or ‘Cost of inputs’. So, ‘cost’ refers to the money expenditure incurred by the farmer in employing resources and resource services in his production programme. The determinants of cost of production include, the size of agri-business, the level of production, the nature of technology used, the quantity of resources and resource services used, labour efficiency etc. Thus, the cost of production of a commodity is the aggregate of prices paid for the factors of production used in producing a commodity. Generally, the term ‘cost of production’ refers to the money expenses incurred in the production of a commodity. In the words of Gulhrie and Wallace, ‘ in Economics, cost of production has a special meaning. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management required to produce a commodity. It represents money costs which we want to incur in order to acquire the factors This ebook is exclusively for this university only. Cannot be resold/distributed.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
10 Costs of Production Short Run and Long Run LAURENCE MINERS Fairfield University W hen most people other than economists think of costs, they may logically think about their household budget and the cost of heating their home or the cost of sending a daughter or son to college. Economists, however, are more apt to talk about the prices of these items and consider how households allocate a finite income to meet family needs. When economists con-sider costs, they refer most often to the production deci-sions of firms—what and how much they decide to produce, how they produce it, and how much it costs. The usual free-market assumption of profit-maximizing behav-ior by firms is not necessary for this discussion. All firms, from small local nonprofits, such as community libraries, to large international corporations attempt to operate effi-ciently. That is, they strive to produce the most output at the lowest possible cost. The purpose of this chapter is to consider the produc-tion decisions and associated costs that firms face. It should be clear at the outset that this discussion will be incomplete in that it will not consider the profitability of a firm or the particular market in which it operates. A firm may produce a safe, reliable product at minimum cost, using the best technology, but fail if there is insuffi-cient demand for its product. Similarly, an inefficient, lumbering, pollution-generating company may make sig-nificant profits if it dominates its industry and has a loyal following of customers. This is not meant to be seen as an endorsement of any particular industry structure. Rather, it is to point out that the costs and production decisions that firms make address only part of the economic sur-vival equation. One must also consider the demand for the firm's product and the market in which it operates.
eBook - ePubManagement Economics: An Accelerated Approach
An Accelerated Approach
- William G. Forgang, Karl W. Einolf(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
5The Costs of Production
This chapter examines the relationship between costs and output and discusses how a firm’s Costs of Production influence production, pricing, and competitive strategy decisions.Learning ObjectivesThe successful reader understands:• The relationship between costs and output• How costs affect production and pricing decisions• How costs affect the number and relative size of competitors in a market• How the structure of costs helps to define a firm’s competitive strategyThe primary question in this chapter is how costs vary with output. The answer depends upon the economic time period . Economists recognize four distinct time periods: the market period, the short run, the long run, and the very long run. The time period distinctions do not coincide with calendar time. Rather, the time periods refer to degrees of flexibility in the production process. Other topics in this chapter include the relationship between the Costs of Production and the number and relative size of firms in an industry as well as the business strategy implications of a firm’s Costs of Production.Accounting and Economic CostsBefore examining the economic time periods, it is necessary to establish that economists view costs differently than accountants do. Economists include opportunity costs, which affect the allocation of finite resources among competing uses.Consider the video rental store in Table 5.1 . This store’s gross sales revenue is $100,000. The direct payments for rent, videos, utilities, and labor total $80,000.Table 5.1 Explicit Costs and Accounting ProfitIncome Statement Item $ Gross sales revenue $100,000 • Rent, materials, labor, and utilities $80,000 Accounting profit $20,000 Table 5.1 shows the video store’s profit is $20,000. This calculation is the accountant’s definition of profit. Accountants consider only direct payments. In Table 5.1
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
• See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable. • Show how input price changes affect a firm’s cost curves. • Differentiate between a firm’s long-run and short-run cost curves. • Explain the impact of learning by doing on production cost. • Understand how the minimum efficient scale of production is related to market structure. • Describe how cost curves can be applied to the problem of controlling pollution. • Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently? • Overview how cost functions can be empirically estimated through surveys and regression analysis. • Short-Run Cost of Production 183 The Nature of Cost Although a firm’s cost of production is commonly thought of as its monetary outlay, this view of cost is too narrow for our purposes. Because, as economists, we wish to study the way cost affects output choices, employment decisions, and the like, cost should include sev- eral factors in addition to outright monetary expenses. As discussed in Chapter 1, the rele- vant cost to a firm of using its resources in a particular way is the opportunity cost of those resources—the value the resources would generate in their best alternative use. Opportunity cost reflects both explicit and implicit costs. Recall that explicit costs arise from transactions in which the firm purchases inputs or the services of inputs from other parties; they are usu- ally recorded as costs in conventional accounting statements and include payroll, raw mate- rials, insurance, electricity, interest on debt, and so on. Implicit costs are those associated with the use of the firm’s own resources and reflect the fact that these resources could be employed elsewhere. Although implicit costs are difficult to measure, we must take them into account in analyzing the actions taken by a firm.
- Trefor Jones(Author)
- 2004(Publication Date)
- Wiley(Publisher)
If output were 200, then total cost would be 760 and average cost 3.8. Marginal cost The concept of marginal cost only has meaning for an individual product if the output of the other product is held ¢xed. Thus, if the output of product 1 is held constant, 152 PART III g UNDERSTANDING PRODUCTION AND COSTS then any cost incurred by increasing the output of product 2 can be attributed to product 2 and be regarded as the marginal cost of that product. ECONOMICS VERSUS ACCOUNTING COST CONCEPTS The economist’s concepts of costs do not necessarily coincide with the cost concepts used by businesses or accountants: for accounting, costs are only incurred where a ledger entry is required because money has been spent; and for economists, the main concept is that of opportunity cost. The cost of any input in the production of any good or service is the alternative it could have produced if used elsewhere, whether valued in monetary terms or not: for example, if ¢nancial resources can earn 5% in a bank account, then this is a measure of the opportunity cost of using the funds for some other purpose. However, the alternative use is not always easily identi¢able or translatable into monetary values. It may also be di⁄cult to attribute alternative values to two inputs that are used together to produce a single product. The simple solution is to use market prices; but, they only fully re£ect opportunity costs if all resources are scarce and price is equal to marginal cost. If resources have no alternative use, then their opportunity costs are zero (see Chapter 23). Explicit and implicit costs Another di¡erence between the two approaches is the distinction between explicit and implicit costs. Explicit costs involve expenditure, whereas implicit costs do not. For example, if a retail ¢rm operates two shops, one of which it rents the other it owns, then in terms of costs incurred, rent is paid to the owner of the premises for shop 1, but no rent is paid to itself as owner of shop 2.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Production and Cost in the Firm 7 • Why do too many cooks spoil the broth? • Why do movie theaters have so many screens? Why don’t they add even more? • If you go into business for yourself, how much must you earn just to break even? • Why might your grade point average fall even though your grades that term improved from the previous term? Answers to these and other questions are discovered in this chapter, which introduces production and cost in the firm. Huchen Lu/iStockphoto.com Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 142 • Explicit costs and implicit costs • Economic profit and normal profit • Increasing returns and diminishing returns • Total product and marginal product • Fixed cost and variable cost • Short run and long run • Economies and diseconomies of scale • Minimum efficient scale C hapter 6 explored the consumer behavior shaping the demand curve. You were asked to think like a consumer, or demander. This chapter considers the pro-ducer behavior shaping the supply curve. You must now think like a producer, or supplier. You may feel more natural as a consumer (after all, you are one), but you already know a lot more about producers than you may realize. You have been around them all your life—Walmart, Starbucks, Google, Exxon, Amazon.com, Apple, Home Depot, McDonald’s, Twitter, Facebook, Pizza Hut, Ford, Gap, supermarkets, department stores, drugstores, convenience stores, shoe stores, dry cleaners, and hundreds more. So you already have some idea how businesses operate.
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
After you read this appli- cation about poor customer service, think about how that service could be improved. 326 Chapter 12 Production and the Costs of Production 1. The greatest portion of measured output in the U.S. economy comes through the business sector. Categories have been developed for classifying production. Producing sectors is a broad category that includes the services, manufacturing, and other sectors; industry is a narrower category that includes firms producing similar products or using similar processes. 2. A production function shows the output that results when a particular group of inputs is processed in a certain way. Firms have a choice of production functions and seek the least‐cost, or efficient, method for producing a desired quantity and quality of output in order to maximize profit. 3. The development of new productive inputs and techniques can come from technological change. Technological change can also lead to creative destruction: New inputs and processes cause those currently in use to become obsolete and some areas of an economy to grow while others decline. 4. The choice of a method of production is influenced by the time frame in which a business plans its operations. The short run is a time period in which some factors of production are variable in amount and some are fixed. The capabilities of the fixed factors, because they cannot be changed, serve as a boundary within which production takes place. The long run is a time period in which all factors are regarded as variable. 5. In the short run, the total cost of producing a certain level of output is found by adding total fixed cost and total variable cost. Total fixed cost is the same regardless of how much is produced; total variable cost increases as output increases. Average total cost is the cost per unit of output at a given level of production and is found by dividing total cost by the number of units of output produced.
eBook - PDFManagerial Economics
Problem-Solving in a Digital World
- Nick Wilkinson(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
However, McKinsey adds a cautionary note to this optimism. There are large network effects with digitization, because of the high fixed costs and close to zero marginal costs. These effects act as a technical barrier to entry and are likely to cause Case Study 6.1 273 6.2 Basic Terms and Definitions What is production theory? Normally, when economists use the term ‘production theory’ they are referring to the specific stage of the overall production process described in the introduction relating to production itself. Essentially, production theory examines the physical relationships between inputs and outputs. By ‘physical relationships’ we mean relationships in terms of the variables in which inputs and outputs are measured: number of workers, tons of steel, barrels of oil, megawatts of electricity, hectares of land, number of drilling machines, number of automobiles produced, and so on. Obviously, managers are concerned with these relationships because they want to optimize the production process, in terms of efficiency. Certain important factors are taken as given here: we are not considering what type of product we should be producing, or the determination of how much of it we should be producing. The first question relates to the demand side of the firm’s strategy and is connected with the first two stages of the overall production process: research and data analysis, and design. The second question involves a consideration of both demand and cost, which is examined in a later chapter on pricing. What we are considering in this chapter is how to produce the product in terms of the implications of using different input combinations at different levels of output. For example, we can produce shoes using factories that make extensive use of automatic machinery and more skilled labour in terms of machine operators, or we can produce them in factories involving more labour-intensive methods and more unskilled labour.
- Walter Nicholson, Christopher Snyder(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
At these levels, the firm would experience increasing returns to scale—the total cost curve is concave in its initial section. As output expands, however, the firm must add additional workers and capital equipment, which perhaps need entirely sepa-rate buildings or other production facilities. The coordination and control of this larger-scale organization may be successively more difficult, and diminishing returns to scale may set in. The convex section of the total cost curve in panel d reflects that possibility. The four possibilities in Figure 8.3 illustrate the most common types of relationships between a firm’s output and its input costs. This cost information can also be depicted on a per-unit-of-output basis. Although this depiction adds no new details to the information already shown in the total cost curves, per-unit curves will be quite useful when we analyze the supply decision in the next chapter. 8-3a Average and Marginal Costs Two per-unit-of-output cost concepts are average and marginal costs. Average cost ( AC ) measures total costs per unit. Mathematically, Average cost 5 AC 5 TC q . (8.6) This is the per-unit-of-cost concept with which people are most familiar. If a firm has total costs of $100 in producing 25 units of output, it is natural to consider the cost per unit to be $4. Equation 8.6 reflects this common averaging process. For economists, however, average cost is not the most meaningful cost-per-unit figure. In Chapter 1, we introduced Marshall’s analysis of demand and supply. In his model of price determination, Marshall focused on the cost of the last unit produced because it is that cost that influences the supply decision for that unit. To reflect this notion of incre-mental cost, economists use the concept of marginal cost ( MC ). By definition, then, Marginal cost 5 MC 5 Change in TC Change in q . (8.7) average cost Total cost divided by output; a common measure of cost per unit.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
Thus, when marginal cost is below average cost, average cost is falling; when marginal cost is above average cost, average cost is rising; marginal cost crosses average cost at the bottom of the average cost ∪ . 9. The shapes of the cost curves are related to the shapes of the product curves. For example, we have AVC ¼ P L / APL and MC ¼ P L / MPL , where P L (the wage rate of labor) is a constant. These formulas convert the inverted ∪ shapes of APL and MPL to the ∪ shapes of AVC and MC. Dangerous Curve In drawing the cost curves, remember that TC and VC belong on a graph whose vertical axis shows “ dollars, ” while AVC , AC , and MC belong on a graph whose vertical axis shows “ dollars per unit of output. ” Remember, also, that all of these curves have an implicit unit of time built into them; thus, when we say that it takes 2 workers to produce 6 units of output, we really mean that it takes 2 workers to produce 6 units of output in a given, prespecified period of time. PRODUCTION AND COSTS 143 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6.2 Production and Costs in the Long Run Typically, there are many ways to produce a unit of output. What can be done by 3 workers with 5 machines can perhaps also be done by 6 workers with only 1 machine. In the long run, the firm can adjust its employment of both labor and capital so as to achieve the least expensive method of producing a given quantity of output. Our first task will be to develop some geometry to help clarify the firm ’ s considerations.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
