Economics
Production Cost
Production cost refers to the expenses incurred in creating goods or services, including the costs of raw materials, labor, and overhead. It encompasses both fixed costs, such as rent and equipment, and variable costs, like wages and materials. Understanding production costs is crucial for businesses to determine pricing, profitability, and efficiency.
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eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
307 CHAPTER OBJECTIVES Explore some production basics: categories for productive activity, production methods, and technology and creative destruction. Differentiate between the time frames in which production occurs and identify various types of costs. Identify the types of costs associated with the short‐run and explain their behavior patterns. Identify long‐run costs and their behavior patterns. Provide a more detailed understanding of short‐run average costs. We engage in many productive activities. Students produce papers and projects; fami- lies wash cars and clothes and make meals; businesses produce computers, office buildings, and financial advice; and governments provide police and fire protection. Production is a process: It involves taking resources, like labor and materials, and using them to make goods and services. This chapter is concerned with the microeconomic aspects of production. While all of the areas of the economy engage in production, the vast majority of measured production is done by businesses. So, while many of the concepts in this chapter can be applied to other areas, the focus is on goods and services produced by business firms and their costs of production. There is an important connection between a firm’s production, its costs of pro- duction, and its objective to maximize profit. Remember from the previous chapters that profit is what remains after costs are subtracted from revenue. All other things remaining unchanged, the lower the cost of producing a product, the greater the firm’s profit from selling that product. Production and the Costs of Production CHAPTER 12 308 Chapter 12 Production and the Costs of Production PRODUCTION BASICS In 2014, the U.S. economy produced more than $17 trillion of goods and services. 1 Trying to sort through this huge macroeconomic number in order to explore produc- tion at a microeconomic level is a formidable task. Let’s look at several ways in which the micro perspective is organized.
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 - PDFThe Economics Of Livestock Systems In Developing Countries
Farm And Project Level Analysis
- James R Simpson(Author)
- 2019(Publication Date)
- CRC Press(Publisher)
Production Costs The terms l21ill and average costs are regularly used in the budgeting process. For example, in a cost-and-returns budget for a sheep opera-tion, total annual cost of production can be calculated by summing up each production expense item. This total cost can be divided by the number of lambs sold to calculate an average cost per lamb produced. These total and average costs are for one point on the TPP function. It is not possible to determine from a single-cost budget the stage in which the production is taking place. However, economists do calculate total and average costs of production on existing operations and often develop budgets in a simulation framework to determine the effect of a certain production practice. Total Costs It is possible to develop cost estimates for a whole host of produc-tion alternatives and to derive cost curves from these estimates. These curves are quite useful both conceptually and empirically for they provide guidelines about the effect from various production and price situations. For simplicity, let us assume once again that all variables except one are 32 held constant. Thus, there is only one variable cost in Figure 2.6. Output is now on the horizontal axis because conventional economic graphical analysis calls for cost to be on the vertical axis. Total fixed costs (TFC)--that is, those that do not vary during the production period--are a straight horizontal line because they do not change as output changes. Total variable cost (TVC) is computed by multiplying the amount of variable input used by the price per unit of input. Because TVC increases as output increases, the shape of the TVC curve depends on the shape of the production function. For the classical production function, like the one presented in Figure 2.2, TVC will approximate the one in Figure 2.6--TVC will continually increase even though it bends backward to reflect the decline in output after the maximum point on the TPP curve has been passed.
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.
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