Cost of Production

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Cost of Production by Mind Map: Cost of Production

1. Cost

1.1. Definition

1.1.1. Economists' Implicit + Explicit costs= Total opp costs Economic Profit+ Total opp costs = TR

1.1.2. Accountants' Explicit Costs = TC Accounting Profit + TC = TR

1.1.3. Implicit Costs: Opp. Costs opp costs from factor inputs opp costs from FOP

1.1.4. Explicit Costs: Tangible, incurred when firm makes actual monetary payment

2. Short Run

2.1. Definition

2.1.1. A period of time in which at least one FOP is fixed in qty

2.1.2. Output increased only through more variable factors

2.2. Costs

2.2.1. Fixed Costs Definition : do not vary with amt of output produced, e.g. rent for restaurants, costs of machines cost remain even if output=0

2.2.2. Variable Costs Definition: vary directly with amt of output produced, e.g. payment for ingredients, salaries Doesn't increase @ constant rate 1) increases at decreasing rate initially 2) increases at increasing rate

2.2.3. Total Costs= TFC +TVC

2.2.4. Average Costs AFC Fixed Costs per unit of output produced. AFC =TFC/Q AVC Variable Costs per unit of output AVC = TVC/Q ATC AC= AFC + AVC AC = TC/Q

2.2.5. Marginal Costs Definition: increase in TC that arise from production of an additional unit of output MC = ΔTC / ΔQ MC = = ΔTVC / ΔQ (in short run, constant TFC)

2.2.6. Cost Curves

3. Long Run

3.1. Definition

3.1.1. A period of time in which all factor of production can be varied in quantity

3.2. Costs

3.2.1. Long Run Costs LRAC: shows lowest unit of cost firm can attain at every given output lvl Profit=max firm will use least costly combi of factors to produce any given output = productively efficient at that output. For the firm, any pt. on LRAC is productively efficient.

4. Economies of Scale

4.1. Internal EOS

4.1.1. Firm's cost per unit of output decreases as firm expands scale of production

4.1.2. Types of Internal EOS Technical EOS Specialisation and division of labour Indivisibilities Greater efficiency of large numbers Financial EOS Managerial EOS Commercial/Marketing EOS Risk-bearing EOS

4.2. Internal DOS

4.2.1. Increasing scale of production leads to higher cost per unit of output.

4.2.2. Factors 1. High cost of monitoring and management 2. X-inefficiency 3. Low morale of manangement

4.3. External EOS

4.3.1. A firm's costs per unit of output decreases as whole industry expands

4.3.2. Factors Avail. of shared resources Infrastructure Industry-specific skilled labour

4.4. External DOS

4.4.1. Increase in firm's long-run AC due to expansion of industry

4.4.2. Factors Strain on physical infrastructure Shortage of industry-specific infrastructure