The document discusses various concepts related to production costs, including: 1. It defines costs and different types of costs such as explicit costs, implicit costs, fixed costs, and variable costs. 2. It explains the differences between economic profit and accounting profit, noting that accounting profit ignores implicit costs. 3. It discusses production functions and how diminishing marginal returns can affect total costs in both the short-run and long-run for firms.

1. The Costs Of
Production
Shaikha Salah AlMidfa 201017515
AfraHumaid AlShamsi 20105205
Fatima Obaid Al Suwaidi 201010455
Fatma Ahmed AlFalasi 200911404

2. CONTENT
Total Revenue, Total Cost, and Profit
Opportunity Costs
Economic Profit vs. Accounting Profit
Production & Costs
The Various Measures Of Costs
Costs In The Short & Long Run

3. Cost Of Production
Cost: “An amount that has to be paid or given up in order to get
something.”
What controls the behavior of a producer?
(http://www.businessdictionary.com/definition/cost.html#ixzz1vKqC0lpM)

4. Industrial Organization
The study of how firms decisions about
prices and quantities depend on the
market conditions they face.
Examples on Market Conditions:
• Number of Competitors
• What and how much a customer demands

5. Achieving profit
Profit = Total Revenue – Total Cost
Total Revenue: The Total Cost: The
amount a firm market value of the
receives for the sale inputs a firm uses in
of its output production

6. Opportunity Costs
“The cost of something is what you give up to get it”
Ten Principles Of Economics
Explicit Costs: Input costs that require an outlay of money by the firm
- Wages
- Rent Payments
- Utilities
Implicit Costs: Input costs that do not require an outlay of money by the firm

7. Economists Vs. Accountants
Economists are interested in production&pricing decisions
Implicit Costs Explicit Costs
Accountants are interested in keeping track of money flows
Implicit Costs Explicit Costs

8. The Cost Of Capital Is An
Opportunity Cost
The Opportunity Cost of the financial capital that has been invested in the
business is an important implicit cost.
Capital: $ 900,000
$ 18,000 > or < 18,000 ?
(2%) Annual Opportunity Cost

9. Economic & Accounting Profit
Economic Profit: Total revenue minus total cost (including
both explicit & implicit costs)
Accounting Profit: Total revenue minus total explicit cost
* Accounting Profit > Economic profit
Because Implicit costs are ignored.
Explici
t
Explicit
Implicit
Accounting Profit Economic Profit

10. Production function
Quantity of output
(cookies per hour)
100
80
60
40
20
0 1 2 3 4 5 Number of
workers hired

11. Total cost curve
Marginal product
Total
cost
60
50
40
30
20
10
Quantity of
0 20 40 60 80 100 120 output (cookies
per hour)

12. Production function
Number Output Marginal Cost of Cost of Total cost
of (quantity products of workers worker of inputs
workers of cookies labor s cost of
produced factory +
per hour) cost of
workers)
0 0 $30 $0 $30
50
1 50 30 10 40
40
2 90 30 20 50
30
3 120 30 30 60
4 140 20 30 40 70
5 150 10 30 50 80
Diminishing marginal product

13. From the production function To The Total-Cost
Curve

14. Fixed and variable costs
 Fixed costs (FC): costs that do not vary with the quantity
of output produced.
 Variable costs (VC): costs that vary with the quantity of
output produced.
 Total cost (TC) = FC + VC

15. Example of the various measures of cost: Conrad’s coffee shop
Quantity Total Fixed cost Variable Average Average Average Marginal
of coffee cost cost fixed variable totalcost cost
(cups per cost cost
hour)
0 $ 3.00 $ 3.00 $ 0.00 _ _ _
1 3.30 $ 3.00 0.30 $ 3.00 $ 0.30 $ 3.30 $ 0.30
2 3.80 $ 3.00 0.80 1.50 0.40 1.90 0.50
3 4.50 $ 3.00 1.50 1.00 0.50 1.50 0.70
4 5.40 $ 3.00 2.40 0.75 0.60 1.35 0.90
5 6.50 $ 3.00 3.50 0.60 0.70 1.30 1.10
6 7.80 $ 3.00 4.80 0.50 0.80 1.30 1.30
7 9.30 $ 3.00 6.30 0.43 0.90 1.33 1.50
8 11.00 $ 3.00 8.00 0.38 1.00 1.38 1.70
9 12.90 $ 3.00 9.90 0.33 1.10 1.43 1.90
10 15.00 $ 3.00 12.00 0.30 1.20 1.50 2.10

16. Conrad’s total-cost curve

17. Average and marginal cost
 Average total cost = total cost/quantity
ATC = TC/Q
 Marginal cost : the increase in total cost that arises from
an extra unite of production.
Marginal cost = change in total cost/change in quantity
MC = ∆TC/ ∆Q

18. Cost curves and their shapes:
 average total cost (ATC): total cost divided by the quantity
of output.
 Average fixed cost (AFC): fixed cost divided by the
quantity of output.
 Average variable cost (AVC): variable cost divided by the
quantity of output.
 Marginal cost (MC): the increase in total cost that arises
from an extra unite of production.

19. Conrad’s average-cost and
marginal-cost curves

20.  The cost curves shown here for Conrad’s coffee shop have
some features that are common to the cost curves of many
firms in the economy.
1. Rising marginal cost
2. U-shaped average total cost
3. The relationship between marginal cost and average total
cost.

21. Typical cost curves

22.  The division of total costs
between fixed and variable
costs depends on the
time horizon.

23. Short Run
 Example: Ford Motor Company
 Size of the factory is fixed in the short run
 To vary quantity of cars produced, ford will have to change
the number of workers they employ.
 Increase in quantity of cars produced, increases the cost.

24. Diminishing Marginal Returns:
“A law of economics stating that, as the number of new
employees increases, the marginal product of an additional
employee will at some point be less than the marginal
product of the previous employee.”
 Problem of overcrowding

25. Long Run
 Example: Ford Motor Company
 Inputs are variable in the long run
 Firms can expand the size of factories, build new factories
or close old ones.
 Ford can expand both the size of the factory and the
workforce

26. LRATC Curve
Firm can choose from 3 factory sizes: S, M, L.
The firm can change it’s factory size in the long run not in the
short run.

27. LRATC Curve
 To manufacture less than QA, in the long run the firm will
choose size S.
 To manufacture between QA and QB, in the long run the
firm will choose size M.
 To manufacture more than QB, in the long run the firm will
choose size L.

28. Scale of Production
 Economies of scale: Long run average total cost falls as the
quantity of output increases.
 Constant returns to scale: Long run average total cost
stays the same as the quantity of output changes
 Diseconomies of scale: Long run average total cost rises as
the quantity of output increases

29. Scale of Production
 Economies of Scale: Allows specialization among workers.
 It allows each worker to become better at a specific task
 Example: Assembly Line
 Diseconomies of scale: Coordination problem
 The more stretched the management become. It becomes
less effective.
QUIZ

30. Quick Quiz
1) Profit = Total Revenue + Total Cost False
1) Accountants include Explicit & Implicit Costs False
1) Fixed costs do not vary but variable costs do True

31. Thanks For Listening