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Colegio de Dagupan School of Business and Accountancy Managerial Economics Module 4 : Cost of Production Learning Outcomes: 1. Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs. 2. Relate the law of diminishing returns to a firm's short-run production costs. 3. Describe the distinctions between fixed and variable costs and among total, average, and marginal costs. 4. Use economies of scale to link a firm's size and its average costs in the long run. 5. Give business examples of short-run costs, economies of scale, and minimum efficient scale (MES). This module develops a number of crucial cost concepts that will be employed in the succeeding three chapters to analyze the four basic market models. A firm’s implicit and explicit costs are explained for both short and long run periods. The explanation of short run costs includes arithmetic and graphic analyses of both the total, average, and marginal-cost concepts. The law of diminishing returns is explained as an essential concept for understanding average and marginal cost curves. The general shape of each cost curve and the relationship they bear to one another are analyzed with special care. The final part of this module develops the long run average cost curve and analyzes the characteristics and factors involved in economies and diseconomies of scale. Economic costs are the payments a firm must make, or incomes it must provide, to resource suppliers to attract those resources away from their best alternative production opportunities. Payments may be explicit or implicit. (Recall the opportunity-cost concept)
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Colegio de Dagupan School of Business and Accountancy Managerial Economics Explicit costs are payments to non-owners for resources they supply. For example, a T-shirt factory’s explicit costs will include the cost of the fabrics to be sewn into T- shirts, clerk’s salary, and utilities.
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