the costs of production

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The Costs of Production • Explicit and Implicit Costs – Explicit Costs: Money payments that a firm makes for the use of resources owned by others (labor, materials, fuel, etc.) – Implicit Costs: The opportunity costs of self-owned resources. The value of the next best thing you could do with your labor, time, tools, entrepreneurial talent, etc. Things you could have gotten paid to do.

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The Costs of Production. Explicit and Implicit Costs Explicit Costs: Money payments that a firm makes for the use of resources owned by others (labor, materials, fuel, etc.) - PowerPoint PPT Presentation

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Page 1: The Costs of Production

The Costs of Production

• Explicit and Implicit Costs– Explicit Costs: Money payments that a firm makes

for the use of resources owned by others (labor, materials, fuel, etc.)

– Implicit Costs: The opportunity costs of self-owned resources. The value of the next best thing you could do with your labor, time, tools, entrepreneurial talent, etc. Things you could have gotten paid to do.

Page 2: The Costs of Production

Walt and Jesse make peanut brittle in their lab.Explicit Costs: the equipment, electricity, the

ingredients, rent for the building, transportation to ship the product, etc.

Implicit Costs: all the money they could have made cooking something else in the lab.

Page 3: The Costs of Production

Accounting Profit, Normal Profit, and Economic Profit

Accounting Profit – Business makes enough to cover its explicit costs. Any more is accounting profit.

Normal Profit – business makes enough to cover its explicit costs plus implicit costs, including enough to pay the entrepreneur an amount equal to what he or she could make running a business of a similar scope.

Economic Profit – profit over and above normal profit. It is an added reward to the entrepreneur and what lures new companies into an industry.

Page 4: The Costs of Production

Jesse: “This is awesome, Mr. White. We spent $2000 on ingredients and materials, $10,000 to rent the lab and equipment for the month. We sold our peanut brittle for $20,000. That’s an $8000 profit!”

Walt: “Jesse you’re an idiot!!! …”

Page 5: The Costs of Production
Page 6: The Costs of Production

Short Run vs. Long Run

• Short run: To little time for a firm to change its plant capacity, but enough to change production levels by varying the amounts of resources (material, labor, etc.).

• Long Run: Enough time for a firm to alter plant capacity. For an industry, it’s also enough time for new firms to enter the business or existing firms to exit.

• Short run = Fixed Plant• Long Run = Variable Plant

Page 7: The Costs of Production

Short-Run Production Relationships

• Total Product (TP) – Total quantity produced.• Marginal Product (MP) – The extra output

achieved by adding one more unit of some variable resource (one more worker, one more bag of peanuts, one more barrel of molasses)

• Average Product (AP) – Output per unit of labor.– So if we have 20 employees and produce 100 tons of peanut

brittle, our average output is 5 tons.

Page 8: The Costs of Production
Page 9: The Costs of Production

Law of Diminishing Returns

• As more and more variable resources are added, additional production gains will eventually decline.

Page 10: The Costs of Production

Homework

• Just make sure both of the Chapter 9 reading assignments you’ve gotten so far are done for tomorrow.

Page 11: The Costs of Production

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Area of decreasing marginal returns.

Area of negative marginal returns.

Page 12: The Costs of Production

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