Production and Costs
Table of Contents
This section covers the following topics:
- Basics of production
- Accounting and economic profit
- Productivity, costs, average costs and graphs
- Technical and economic efficiency
- Economies and diseconomies of scale
- The envelope relationship
Section Summary
Production involves the use of factors (raw materials) to produce goods. While accounting profit only takes cash revenues and costs into account, economic profit factors in changes in asset values and opportunity cost.
Because of the Law of Diminishing Marginal Utility, eventually marginal productivity (the additional goods that can be produced by adding one more input) will decrease. Total productivity is the number of goods produced, and average productivity is the good produced per worker.
Some inputs are fixed in the short run, while others are variable. In the long run, all inputs are variable.
Total cost is the sum of fixed cost (cost incurred no matter how much you produce) and variable costs (which fluctuate with the quantity produced). Marginal cost is the cost of producing one more good. The marginal cost curve intersects the average variable cost and the average total cost curves at their respective minimums.
Technical efficiency involves minimizing the use of one input, while economic efficiency requires that you minimize costs.
Economies of scale, which are often generated because indivisible setup costs are divided across more goods as production expands, cause average total cost to fall as the quantity of goods produced increases. Average cost per unit can also increase due to diseconomies of scale.
The envelope relationship relates the long run average total cost with many different possible short run average total cost curves.
Firms and Profit
Overview
Firms are organizations that accomplish three broad tasks:
- Coordinating the inputs necessary for production
- Making stuff
- Selling stuff ... Sign up to continue reading Production and Costs >
