Chapter 4 - Costs of production. In this chapter you will: consider the major organizational forms of business—sole proprietorships, partnerships, and corporations; learn about economic costs (explicit and implicit) of production and economic profit analyze short-run (total, average, and marginal) products, and the law of diminishing marginal returns; derive short-run (total, average, and marginal) costs; examine long-run results of production (increasing returns to scale, constant to scale, and decreasing to scale) and long-run costs. | Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 4 Costs of Production Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Chapter Focus In this chapter you will: consider the major organizational forms of business—sole proprietorships, partnerships, and corporations learn about economic costs (explicit and implicit) of production and economic profit analyze short-run (total, average, and marginal) products, and the law of diminishing marginal returns derive short-run (total, average, and marginal) costs examine long-run results of production (increasing returns to scale, constant to scale, and decreasing to scale) and long-run costs Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Types of Production There are three main sectors in the economy the primary sector consists of industries that extract or cultivate natural resources the secondary . | Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 4 Costs of Production Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Chapter Focus In this chapter you will: consider the major organizational forms of business—sole proprietorships, partnerships, and corporations learn about economic costs (explicit and implicit) of production and economic profit analyze short-run (total, average, and marginal) products, and the law of diminishing marginal returns derive short-run (total, average, and marginal) costs examine long-run results of production (increasing returns to scale, constant to scale, and decreasing to scale) and long-run costs Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Types of Production There are three main sectors in the economy the primary sector consists of industries that extract or cultivate natural resources the secondary sector consists of industries that fabricate or process goods the service sector consists of trade and information industries * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Productive Efficiency Businesses choose from different production processes a labour-intensive process employs more labour and less capital a capital-intensive process employs more capital and less labour The lowest-cost process provides productive efficiency * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Economic Costs Economic costs include explicit costs which are payments to resource supplies outside a business implicit costs which are what owners give up by being involved in a business Economic profit is found by subtracting economic costs (both explicit and implicit) from total revenue * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Production in the Short Run (a) In the short run some inputs (such as capital) are fixed other inputs (such as
