Chapter 4 Costs of Production - 1 4.1 Production Costs and Profit A business is an enterprise that brings individuals financial resources and economic

Chapter 4 Costs of Production - 1 4.1 Production Costs and...

This preview shows page 1 - 2 out of 5 pages.

1 4.1: Production, Costs, and Profit A business is an enterprise that brings individuals, financial resources, and economic resources together to product a good or service for economic gain. Production is the process of transforming a set of resources into a good or service that has economic value. The resources used in production are known as inputs . Recall that natural resources, capital resources, and human resources are the three economic resources used in production. Inputs for most businesses use all 3 of these factors of production. Output is the result of this production, the quantity of a good or service that is produced. Businesses and the industries in which they operate fall into one of three sectors depending on the type of production: primary, secondary, or service (also known as tertiary). Primary sector includes industries that extract or cultivate natural resources, such as mining, forestry, fishing and agriculture. Secondary sector involves fabricating or processing goods and includes, among other industries, manufacturing and construction. Finally, service sector includes trade industries (both retail and wholesale), such as banking and insurance, and the new information industries. A labor-intensive process is one that employs more labor and less capital than do other processes to product a certain quantity of output. Conversely, a capital-intensive process uses more capital and less labor to product the same quantity of output. Owners who want to earn as much profit as possible should try to maximize the business’s productive efficiency , which means making a given quantity of output with the least costly mix of inputs. Highest efficiency depends on both quantity of each input used and prices on those inputs. Businesses face two types of costs: explicit and implicit costs. Explicit costs are payments made by a business to business or people outside of it. Explicit costs are known as “accounting costs” because they include all the costs that appear in the business accounting records from wages, machinery, buildings, materials, etc. In contrast, implicit costs are estimates of what owners give up by being involved with a business-the owner’s own opportunity cost. Implicit costs relate to the resources provided by the owners. An example of implicit cost is normal profit which is the minimum return necessary for owners to keep funds and their entrepreneurial skills in their business. Recall opportunity cost is any sacrifice that is made towards a course of action regardless if that sacrifice is monetary or not. Hence, economic costs encountered by a business are all opportunity costs involved in production and is the sum of both implicit and explicit costs.
Image of page 1

Subscribe to view the full document.

Image of page 2

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes