Chapter 8 Micro - McConnell-Brue - Costs of Production -...

Economics 212X
Principles of Microeconomics

Chapter 8
The Costs of Production

I. Economic Costs
- These are the payments a firm must
make to resource suppliers to attract
those resources away from their best
alternative production opportunities
A. Explicit Costs – payments to non-owners
for resources they supply
- these are cash expenditures to
“outsiders” who supply labor, fuel,
materials, transportation services, etc.

A. Implicit Costs – money payments the self-
employed resources could have earned in their
best alternative employment.
- these are similar to implicit costs
A. Accounting Profits - Total Revenue – explicit
costs.
.

D. Normal Profits – are considered an implicit
cost because they are the minimum payments
required to keep the owner’s abilities employed
- these are the payments one would
otherwise receive for performing
entrepreneurial functions.
E. Economic Profits - are equal to total revenue
minus all costs (explicit and implicit including
normal profit)
- if Total Revenue > Costs, then the
residuals go to the entrepreneur

A. Short-run – the time period that is too
brief for a firm to alter its plant capacity.
B. Long-run – the period of time long
enough for a firm to change the
quantities of all resources, including the
plant size.

II. Short-Run Production
Relationships
A. Short-run production reflects the law of
diminishing returns that states that as
successive units of a variable resource
are added to a fixed resource, beyond
some point the product attributable to
each additional resource unit will decline.

1.