This chapter provides knowledge of costs of production. The contents of this chapter include all of the following: The economic concept of cost and profit, fixed and sunk cost, profit maximization with limited capacity, the cost of production, long run cost, economies of scale, economies of scope, the learning curve, cost analysis and optimal decisions. | Costs of production Outline The economic concept of cost and profit Fixed and sunk cost Profit maximization with limited capacity The cost of production Long run cost Economies of scale Economies of scope The learning curve Cost analysis and optimal decisions Opportunity cost Economists would count the following as a part of cost: Explicit, out-of-pocket costs such as tuition, books, and fees Implicit, or opportunity, cost, ., the income (or utility) lost by not pursuing your next best alternative, such as a fulltime job. What is the true cost of pursuing a MBA degree? Entrepreneurs have opportunity costs as well. For example , if I put my energy and talent into the restaurant business, I am giving up profits I could earn somewhere else. Normal profit A normal profit is the minimum profit sufficient to compensate entrepreneurs for profits lost by not pursuing their next best business opportunity Economists treat a normal profit as an implicit cost—that is, the cost of . | Costs of production Outline The economic concept of cost and profit Fixed and sunk cost Profit maximization with limited capacity The cost of production Long run cost Economies of scale Economies of scope The learning curve Cost analysis and optimal decisions Opportunity cost Economists would count the following as a part of cost: Explicit, out-of-pocket costs such as tuition, books, and fees Implicit, or opportunity, cost, ., the income (or utility) lost by not pursuing your next best alternative, such as a fulltime job. What is the true cost of pursuing a MBA degree? Entrepreneurs have opportunity costs as well. For example , if I put my energy and talent into the restaurant business, I am giving up profits I could earn somewhere else. Normal profit A normal profit is the minimum profit sufficient to compensate entrepreneurs for profits lost by not pursuing their next best business opportunity Economists treat a normal profit as an implicit cost—that is, the cost of attracting entrepreneurship. Accounting Profit Accounting = Revenues – Explicit (Accounting) Cost We accountants would subtract explicit, or accounting cost, from revenues to compute profit. Economic Profit Economic = Revenues – (Explicit + Implicit Cost) Economists would subtract economic cost (including a normal profit) from revenues to compute an economic profit Fixed and Sunk Costs Fixed costs (FC) are elements of cost that do not vary with the level of output. Examples: Interest payments on bonded indebtedness, fire insurance premiums, salaries and benefits of managerial staff. Sunk costs are costs already incurred and hence non-recoverable. Examples: Research & development costs, advertising costs, cost of specialized equipment. -maximization with limited capacity: Ordering a best seller Suppose the bookseller’s estimated (inverse) demand equation is given by: P = 24 – Q, where P is dollars and Q is quantity in hundreds of copies per month. The cost to the bookseller is $12 per .
