Costs of Production (1)

Costs of Production (1) - CostsofProduction Lectures...

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Costs of Production Lectures Supratim Das Gupta
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Key Questions to address: What is a production function? What do  we mean by marginal product? What are the various costs of production  and how are they related to each other  and to output? How are costs different in the short run  and the long run? What do we mean by “economies of  scale”?
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THE COSTS OF  PRODUCTION 3 Total Revenue, Total Cost,  Profit We assume that the firm’s goal is to  maximize profit . Profit   =   Total revenue   –   Total cost the amount a  firm receives  from the sale  of its output the market  value of the  inputs a firm  uses in  production 0
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Costs of Production Recall from Chapter 1, one of the  Ten  Principles: Opportunity Cost  of an item is what must be  given up to acquire that item; Firms Cost’s can either be implicit or  explicit: Explicit Costs: input costs that require an  outlay of money by the firm; eg. wages paid  to labor Implicit Costs: costs that do not require a 
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THE COSTS OF  PRODUCTION 5 Explicit vs. Implicit Costs:  An Example You need $100,000 to start your business.  The interest rate is 5%.  Case 1:  borrow $100,000 explicit cost = $5000 interest on loan Case 2:  use $40,000 of your savings,  borrow the other $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%)  foregone  interest  you could have earned on your $40,000. 0 In both cases, total (exp   imp) costs are $5000.
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THE COSTS OF  PRODUCTION 6 Economic Profit  vs. Accounting Profit Accounting profit   = total revenue minus total explicit costs Economic profit = total revenue minus total costs  (including explicit and implicit costs) Accounting profit ignores implicit costs,  so it’s higher than economic profit.   0
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Economic Profit vs Accounting  Profit Question: Farmer Mc Donald give banjo  lessons for $20/hour. One day, he spends  10 hours planting $100 worth of seeds on  his farm.  What opportunity cost has he incurred? What is the explicit cost? If these seeds yield $200 worth of crops,  does McDonald earn economic profit or an  accounting profit?
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The Production Function production function   shows the  relationship between the quantity of inputs  used to produce a good and the quantity  of output of that good It can be represented by a table, equation  or graph Eg. Farmer Jack grows wheat He has 5 acres of land and can hire as  many workers as he wants
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THE COSTS OF 
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This note was uploaded on 06/03/2011 for the course ECON 224 taught by Professor Ozturk during the Fall '09 term at South Carolina.

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Costs of Production (1) - CostsofProduction Lectures...

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