ch8 - 8: Production & Cost Objectives: Examine...

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Unformatted text preview: 8: Production & Cost Objectives: Examine economic cost & economic profit Determine short-run costs Examine the principle of diminishing returns Look at production and cost in the long- run Economic Cost The key principle underlying the computation of economic cost is opportunity cost. PRINCIPLE of Opportunity Cost The opportunity cost of something is what you sacrifice to get it. In economics, the notion of a firms costs is based on the notion of economic cost. Accounting versus Economic Cost An accountants notion of costs involves only the firms explicit costs: Explicit costs: the firms actual cash payments for its inputs. An economist includes the firms implicit costs: Implicit costs: the opportunity costs of nonpurchased inputs. Economic cost: the sum of explicit and implicit costs. Accounting versus Economic Cost Accounting versus Economic Cost Accounting Approach Economic Approach Explicit Cost (purchased inputs) $60,000 $60,000 Implicit: opportunity cost of entrepreneurs time 30,000 Implicit: opportunity cost of funds 10,000 ______ ______ Total Cost $60,000 $100,000 Short-run versus Long-run Decisions Short run: At least one factor of production remains fixed. Short run decision: How much output to produce in the current facility. Long run: Time it takes for a firm to build a production facility and start producing output. Long run decision: What size and type of facility to build. Diminishing Returns and Marginal Cost The key principle behind the firms short-run cost curves is the principle of diminishing returns. PRINCIPLE of Diminishing Returns Output is produced with two or more inputs Increase one input while holding the other inputs fixed. Beyond some pointcalled the point of diminishing returns output will increase at a decreasing rate. The Firms Short-run Production Function The short-run production function , or total product curve, shows the relationship between the number of workers and the quantity of output produced. Labor Input and Output 0 1 2 3 4 5 6 7 8 9 10 Rakes per minute 0 20 40 60 80 100 120 140 Labor: Number of workers Short-run Production Function Workers Number of Labor: minute per Rakes 8 1 12 2 15 3 20 4 27 5 36 6 48 7 65 8 90 9 130 10 Labor Input and Output The shape of the production function is explained by diminishing returns....
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ch8 - 8: Production & Cost Objectives: Examine...

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