Cost of Production
Costs of Production
July 2011
Topics to be Discussed
Measuring Cost: Which Costs Matter? How do Cost Curves Behave? – Cost in the Short Run – Cost in the Long Run How to Minimize Cost? How to draw Implications for Business Strategy?
Topics to be Discussed
Production with Two Outputs: Economies of Scope Dynamic Changes in Costs: The Learning Curve Estimating and Predicting Cost
Measuring Cost: Which Costs Matter? Accountants tend to take a retrospective view of firms’ costs, whereas economists tend to take a forward-looking view Accounting Cost – Actual expenses plus depreciation charges for capital equipment Economic Cost – Cost to a firm of utilizing economic resources in production, including opportunity cost
Costs as Opportunity Costs
Accountants measure the explicit costs but often ignore the implicit costs. Economists include all opportunity costs when measuring costs. Accounting Profit = TR - Explicit Costs Economic Profit = TR - Explicit Costs Implicit Costs
Explicit and Implicit costs
The firm’s costs include Explicit Costs and Implicit Costs: – Explicit Costs: costs that involve a direct money outlay for acquiring factors of production. – Actual expenditure incurred by firm for hire, rent or purchase of the inputs so as to undertake production.
(Exp: Wages to hire labour, rental price of capital, equipment and buildings and purchase price of raw materials and semi finished products).
– Implicit Costs: Costs that do not involve a direct money outlay – (Ex. Opportunity costs of the owner’s own inputs used Implicit wages, implicit rent, cost of capital).
Opportunity Cost
Economic costs distinguish between costs the firm can control and those it cannot Opportunity cost
– Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use
Opportunity cost of an action is the value of the next best alternative forgone. For an Input: What the input could have earned from best
July 2011
Topics to be Discussed
Measuring Cost: Which Costs Matter? How do Cost Curves Behave? – Cost in the Short Run – Cost in the Long Run How to Minimize Cost? How to draw Implications for Business Strategy?
Topics to be Discussed
Production with Two Outputs: Economies of Scope Dynamic Changes in Costs: The Learning Curve Estimating and Predicting Cost
Measuring Cost: Which Costs Matter? Accountants tend to take a retrospective view of firms’ costs, whereas economists tend to take a forward-looking view Accounting Cost – Actual expenses plus depreciation charges for capital equipment Economic Cost – Cost to a firm of utilizing economic resources in production, including opportunity cost
Costs as Opportunity Costs
Accountants measure the explicit costs but often ignore the implicit costs. Economists include all opportunity costs when measuring costs. Accounting Profit = TR - Explicit Costs Economic Profit = TR - Explicit Costs Implicit Costs
Explicit and Implicit costs
The firm’s costs include Explicit Costs and Implicit Costs: – Explicit Costs: costs that involve a direct money outlay for acquiring factors of production. – Actual expenditure incurred by firm for hire, rent or purchase of the inputs so as to undertake production.
(Exp: Wages to hire labour, rental price of capital, equipment and buildings and purchase price of raw materials and semi finished products).
– Implicit Costs: Costs that do not involve a direct money outlay – (Ex. Opportunity costs of the owner’s own inputs used Implicit wages, implicit rent, cost of capital).
Opportunity Cost
Economic costs distinguish between costs the firm can control and those it cannot Opportunity cost
– Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use
Opportunity cost of an action is the value of the next best alternative forgone. For an Input: What the input could have earned from best