Costs of Production Microeconomics Essay

1930 WordsDec 22, 20138 Pages
CHAPTER 3: PRODUCTION COSTS LEARNING OBJECTIVE The purpose of this chapter is to analyze how costs of production change as output is changed. First the concept of economic costs is investigated. Short run patterns of total, average and marginal costs are derived on the basis of the law of diminishing returns. Long run cost patterns are briefly outlined. OPPORTUNITY COST All costs in economics are said to be opportunity costs because anytime a resource is used for any purpose, it implies that some other good cannot be produced with that quantity of the resource, that some other resource is not used for the given production instead, and that revenues from other production are foregone. Thus, costs are either explicit cost for the resource used or implicit costs from alternative use of the resource. When a student takes a course in economics, the cost of taking the course is more than just the money spent on tuition, textbooks and study aids. For instance, the time devoted to studying could have been used to work in a supermarket and earn a nice salary. That salary is not an out-of-pocket cost, but an opportunity cost, which is a real cost nevertheless. | NORMAL PROFIT Among the implicit costs of a firm, normal profit is the most important cost which must be met. Normal profit is that income the business owner, or entrepreneur, would receive if he/she were engaged in some other activity or employment. Thus, if the business owner does not derive what he/she feels he/she deserves, then he/she may well close the business. The owner of a small retail specialty store uptown should expect the store to generate at least as much income as what he/she could earn working as a manager for the department store downtown. Otherwise, the reasonable decision would be to close the store. | PURE PROFIT Pure profit, also known as economic profit,

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