Chapter 21 Printable One-Page Review

How Cost of Production Affects Supply Part 1   See Part 2   View Entire Chapter 21 with videos

Defining costs
1. Costs are the dollars paid for the factors of production.
2. 
Opportunity cost is the value of the best alternate use, e.g.,
 the cost of labor is the value that could have been   
    received from using capital.  
3. Explicit costs versus implicit costs
    a. 
Explicit costs require an out-of-pocket expenditure, e.g., wages, materials, and overhead.
    b. 
Implicit costs do not require an outlay, e.g., forgone wages for uncompensated efforts by family members in
        a family-operated business, included a normal return on investment, which is the minimum
 amount required
        to keep resources employed at their current use.
 
4. Short run costs are both fixed and variable, in the long run, all costs are variable
    a. 
Fixed costs do not vary with production, e.g., plant and equipment, property taxes, most overhead, etc.
    b. Variable costs vary directly with production, e.g., labor and materials 
    
c. Marginal cost is the change in total costs which resultsfrom making one more unit.
5.
 Diminishing returns:  
    a. Adding a variable resource (labor) to a fixed resource (capital) will increase production for a while.
    b. At some point the rate of increase declines and eventually becomes negative. 
    c. Diminishing returns affect both the production of labor and cost of production.
    d. Example: Using three people to do the dishes didn't make sense because the third person just got in the way.
        Mom did agree so she relaxed.

Accounting profits versus economic profits
1.  Accounting profit is revenue minus explicit costs and economic profit is revenue minus explicit plus implicit costs.
2  Since implicit cost includes a payment for the risk factor part of  interest and payment for entrepreneurial skill.
3. This means 
Normal Profit is a cost  to economists and paid for as an explicit cost, in the long run competition 
           causes economic profit to be zero.

Total Cost Analysis 1

Start-up costs cause the curve to rise quickly at low levels of production.   Examples include Incorporating, legal and accounting, Licenses and permits, Remodeling, Rent, Security Deposit or Real Estate Purchase, Signage and marketing materials, Initial inventory Supplies, Furniture and Equipment.

Economies of scale make production very efficient causing the curve to flatten out over a considerable range of production. Examples include labor/management specialization, volume discounts, and use of by-product. Those wanting additional reading see Economies of scale - wiki

Diseconomies of scale cause production to be inefficient and result in the curve rising sharply as maximum capacity is approached. Examples include Bureaucracy and diminishing returns. Japanese flexible production techniques enhance economies of scale and stretched out the low point on the AVC line. These techniques have been adopted by manufacturers around the world. see  Diseconomy of scaleWikipedia, the free encyclopedia.