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Economics 3908 - Economics Chapter 20 The Costs of...

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Economics Chapter 20: The Costs of Production March 9, 2008 Costs exist because resources are scarce, productive, and have alternative uses. When society uses a combination of resources to produce a particular product, it forgoes all alternative opportunities to use those resources for other purposes. The measure of the economic cost or opportunity cost of any resource used to produce a good in the value or worth the resource would have in its best alternative use. A firm’s explicit costs are the monetary payments (or cash expenditures) it makes to those who supply labor services, materials, fuel, transportation, services, and the like. Such money payments are for the use of resources owned by others. A firm’s implicit costs are the opportunity costs of using its self-owned, self-employed resources. To the firm, implicit costs are the money payments that self-employed resources could have earned in their best alternative use. Normal profit- the cost of doing business. It is the implicit cost of entrepreneurship. The economist includes as costs of production all the costs-explicit and implicit, including a normal profit required to attract and retain resources in a specific line of production. To the economist, economic profit is the total revenue less economic costs (explicit and implicit costs, the latter including a normal profit to the entrepreneur) Short run: fixed plant; the short run is a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the fixed plant is used. The firm’s capacity is fixed, but the firm can vary its output by applying larger or smaller amounts of labor, materials, and other resources, to that plant. Long run: variable plant: The long run is a period long enough for it to adjust the quantities of all the resources that it employs including plant capacity. It is long enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry. Both the short run and the long run are conceptual periods rather than calendar time periods. Total product (TP) is the total quantity or the total output of a particular good or service produced.
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