THE COSTS OF PRODUCTION
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
Payments may be explicit or implicit.
opportunity-cost concept in Chapter 2.)
A. Explicit costs are payments to nonowners for resources they supply.
In the text&s
example this would include cost of the T-shirts, clerk&s salary, and utilities, for a total
B. Implicit costs are the money payments the self-employed resources could have
earned in their best alternative employments.
In the text&s example this would
include forgone interest, forgone rent, forgone wages, and forgone entrepreneurial
income, for a total of $33,000.
C. Normal profits are considered an implicit cost because they are the minimum
payments required to keep the owner&s entrepreneurial abilities self-employed.
is $5,000 in the example.
D. Economic or pure profits are total revenue less all costs (explicit and implicit
including a normal profit).
Figure 22-1 illustrates the difference between accounting
profits and economic profits.
The economic profits are $24,000 (after $63,000 +
$33,000 are subtracted from $120,000).
The short run is the time period that is too brief for a firm to alter its plant capacity.
The plant size is fixed in the short run.
Short-run costs, then, are the wages, raw
materials, etc., used for production in a fixed plant.
The long run is a time period long enough for a firm to change the quantities of all
resources employed, including the plant size.
Long-run costs are all costs, including
the cost of varying the size of the production plant.
Short-Run Production Relationships
A. Short-run production reflects the law of diminishing returns that states that as
successive units of a variable resource are added to a fixed resource, beyond some
point the product attributable to each additional resource unit will decline.
CONSIDER THIS & Diminishing Returns from Study
Table 22-1 presents a numerical example of the law of diminishing returns.
3. Total product (TP) is the total quantity, or total output, of a particular good
4. Marginal product (MP) is the change in total output resulting from each
additional input of labor.
Average product (AP) is the total product divided by the total number of workers.