Costs of production

• production costs in economics arise from forgoing the opportunity to produce other goods or services

Types of costs:

· accounting costs (бух.) - Cash expenditures a firm makes to “outsiders” who supply labor services, materials, fuel, transportation.

economic costs Cash expenditures a firm makes to “outsiders” who supply labor services, materials, fuel, transportation.

• Economic costs – All the costs required to attract and retain resources in a specific line of productin.

Consist of:

ü Explicit costs (внешние издржки) бух. Явные

ü Implicit costs (неявные)

ü Normal profit

Implicit costs –

• in addition to “out-resources’, a firm may use resources itself owns.

• the costs of such self-owned, self-employed resources are called implicit costs.

• Implicit costs – money payment the self-employed resources could have earned in their best alternative use.

Types of profit: economic and accounting.

Accounting profit

• the firm’s total revenue less its explicit costs.

Economic profit

• total revenue less all costs (explicit, implicit, including normal profit)

Payment you could receive for performing entrepreneurial functions.

So normal profit – is an implicit cost.

• economic profit=total revenue-economic costs

• if a firm’s total revenue exceed all its economic costs, any residual to the entrepreneur.

Terms of production relationship.

• total product (TP) – is the total quantity or total output, of a particular good produced.

• marginal product (MP) – is the extra output or added product associated with adding a unit of a variable resource in the production process.

• assume, labor – variable resource

MP = дельтаTP/дельтаQ (units of labor)

• average product (AP) – is output per unit of variable recourses.

• assume, labor – variable resource.

AP = TP /quantity of labor

• costs of production depend not only on the prices of needed resources but also on the quantities of resources needed to produce that output.

Short – run and long – run. Law of diminishing returns.

Short-run and long –run

• the capacity(производственная мощность) of a manufacturing plant can be varied only over considerable period of time.

• it may take months or years

Short-run: fixed plant.

• a period too brief for a firm to alter its plant capacity

Short – run: fixed plant

• a period too brief for a firm to alter its plant capacity, yet long enough to vary firm` output by applying larger or smaller amounts of labor, materials, any other resources.

• existing capacity can be used more or less intensively to the short – run.

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