Principles of Economics Chapter 8: Cost of Production PDF Slideshow

PRINCIPLES OF ECONOMICS 2e Chapter 8 Cost of Production PowerPoint Image Slideshow CH.8 OUTLINE Examine what items are included in a firm's costs of produ Analyze the link between a firm's production process and Learn the meaning of average total cost and marginal cost Consider t...

PRINCIPLES OF ECONOMICS 2e Chapter 8 Cost of Production PowerPoint Image Slideshow CH.8 OUTLINE Examine what items are included in a firm's costs of produ Analyze the link between a firm's production process and Learn the meaning of average total cost and marginal cost Consider the shape of a typical firm's cost curves Examine the relationship between short-run and long-run Introduction Entrepreneurs employ factors of production (capital and labour) in order to transform The relationship between output and the inputs used in the production process is calle It specifies how much output can be produced with given combinations of inputs. A p For example, students are educated with teachers, classrooms, computers and books. Production function: a technological relationship that specifies how much 2.1 Technological efficiency vs Economic Efficiency Economists distinguish between two concepts of efficiency: technological efficiency and economic efficiency. Technological efficiency: when the maximum output is produced with the given set of inputs. Economic efficiency: a production structure that produces output at the least cost Production in the Short run The factors of production are the inputs used to produce a good or service in order to produce income. Economists define land, labor, capital and entrepreneurship. Factors of production can be divided into two; Fixed factors: Fixed factors are those which remain unchanged as output of the firm changes in the short-run. Examples Variable factors: Variable inputs, such as labor and raw materials, can be adjusted or changed depending on the level of Production in the Short run Total product: the relationship between total output produced and the number of workers employed for a given amount o Marginal product of labour: the addition to output produced by each additional worker. It is also the slope of the total p The MP of labour is the change in output divided by the change in the number of units of labour employed. Production process and Total Cost Production process and Total Cost Law of diminishing returns: when increments of a variable factor (labour) are added to a fixed amount of another factor (capital), the marginal product of the variable factor must eventually decline. 2.1 Technological efficiency vs Economic Efficiency Short run: a period during which at least one factor of production is fixed. If capital is fixed, more output is produced by Long run: a period of time that is sufficient to enable all factors of production to be adjusted. Very long run: a period sufficiently long for new technology to develop Production process and Total Cost The terms fixed, variable and total costs define the cost structure of a firm. Fixed costs do not vary with output, whereas v Fixed costs: costs that are independent of the level of output. Variable costs: costs that are related to the output produced. Total cost: the sum of fixed and variable costs. Production process and Total Cost AFC = (Fixed cost)/Q = FC/Q AVC = (Total variable costs)/Q = TVC/Q ATC = AFC+AVC Average fixed cost: the total fixed cost per unit of output. Average variable cost: the total variable cost per unit of output. Average total cost: the sum of all costs per unit of output. Link between Total Cost and Marginal Cost Marginal cost: the cost of producing each additional unit of output. It is the additional cost of production divided b The MC can also be calculated as the addition to variable costs rather than the ad Production process and Total Cost The cost structure for the production of snowboards at Black Diamond is illustrated in Table 8.2. Employees are skilled a Production process and Total Cost SKILL TEST 1 SOLUTION 1 SKILL TEST 2 SOLUTION 2 LECTURE ENDS