chapter9 - Production and Cost Have you ever had a...

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Copyright © 2007, .learn, Inc. All rights reserved. Production and Cost H ave you ever had a brilliant idea for a product or service that would make you a millionaire? Chances are, if you took your idea beyond the fantasy stage, you would find that when it comes to producing an item, there’s no free lunch. Whether it’s a hot new bumper-sticker slogan or a way to make delicious ice cream without calories, the hard reality is that getting your product to consumers has a cost. In this chapter we’ll examine the process of supply in markets by looking at the production and cost of goods and services. We’ll see how supply decisions made by the managers of firms are influenced by production and cost considerations that affect the profitability of making goods available to consumers. Cost is a measure of the value of alternatives forgone when we use inputs to make goods or services. Cost depends partly on input prices, such as wages, rental rates for equipment, and unit prices of materials. But cost also depends on how output varies with input use. The productivity of inputs is a key factor in the cost per unit output. In deciding how much to produce, managers consider the output they can get from using various combinations of inputs and the prices of those inputs. The production process involves using inputs to create products. Products can be tangible goods like digital cameras and frozen pizzas or intangible services like education and insurance. Economic theory assumes that no matter what’s produced—aircraft or hairstyling services—certain basic principles of production govern how output varies with inputs used. The most famous principle of production may be diminishing marginal returns , which we’ll discuss in this chapter. After reading this chapter, you should be able to 1. Show how the law of diminishing marginal returns implies a certain pattern of variation in output in the short run when the use of some inputs can’t be varied. 2. Distinguish between variable cost and fixed cost and describe the variation in total cost and other costs as a single-product firm varies production. 3. Explain the relationship between the cost and productivity of inputs and input prices. 4. Derive a long-run average cost curve from short-run average cost curves. Concept Preview
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2 Product Markets Copyright © 2007 .learn, Inc. All rights reserved. Production Relationships Production is the process of using the services of labor and equipment together with other inputs to make goods and services available. Inputs are the labor, capital, land, natural resources, and entrepreneurship that are combined to produce any output—cars, insurance policies, hairstyling, hamburgers. To produce a concert, for example, the inputs would include the concert hall, electricity, and the services of promoters, musicians, sound technicians, equipment transporters, security guards, ticket takers, ushers, and refreshment stand workers. To produce pizzas, the inputs would include the cooks’ labor, pizza ingredients, pans, ovens, boxes, delivery vans, and drivers.
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chapter9 - Production and Cost Have you ever had a...

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