Chapter%208 - Econ 160, Vardanyan Chapter 8 Production...

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Econ 160, Vardanyan 1 Chapter 8 Production Technology and Cost In this chapter we will discuss the cost of production and how it varies with the quantity of output produced, i.e. we will define the concept of production technology. Introduction Every producer is concerned with maximizing its profit. Because profit is defined as a difference between revenue and production cost, minimizing costs helps achieve this goal. The definition of cost we adopt in this course is that of economic cost, defined as the opportunity cost of production, including both explicit and implicit cost. Explicit cost is the firm’s actual cash payment for inputs (i.e. its employees’ wages), whereas implicit cost is the opportunity cost of non-purchased inputs (for example, the opportunity cost of owner’s time). In contrast, the accounting cost, which is the notion of the cost you are perhaps more familiar with, includes only explicit cost. Hence, while the economic profit is equal to the difference between the revenue and the sum of explicit and implicit cost, the accounting profit is the difference between revenue and explicit cost (or accounting cost) only. Consider, for example, the implicit costs of a convenience store owner. S/he incurs an opportunity cost when s/he decides to run the store rather than to work for a wage compensation at a local factory. The wage income is the income s/he has to forego to run the store and, therefore, should be included as part of the owner’s total cost of running the store. We call this component of cost the opportunity cost of owner’s time . In addition, if the entrepreneur had to spend some of his or her own funds to start the business then the implicit cost would include another component – the opportunity cost of the owner’s funds . It equals the interest income that this amount could have earned if, say, deposited into the owner’s savings account (or used to buy corporate stocks and bonds). In our analysis we will look at the production cost in the short run and in the long run . In the short run some of the firm’s production inputs are not flexible, whereas the long run is a period of time long enough to make all of the inputs perfectly flexible. For instance, a firm might be limited in the size and the number of its plants in the short run, but not in the long run. In such cases we will say that the firm’s capital is fixed. The Fixed Production Facility: Short-Run Costs
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This note was uploaded on 05/27/2008 for the course ECON 160B taught by Professor Michaelvardanyan during the Fall '08 term at Binghamton University.

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Chapter%208 - Econ 160, Vardanyan Chapter 8 Production...

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