Section 3: The Relationship Between Production and Costs
| Number of Workers | Total Worker Cost | Total Cost of All Factors in Dollars | Total Production of Cars | Average Cost Per Car in Dollars |
| 0 | 0 | 5,000 | 0 | – |
| 1 | 4,000 | 9,000 | 3 | 3,000 |
| 2 | 8,000 | 13,000 | 7 | 1,857 |
| 3 | 12,000 | 17,000 | 15 | 1,133 |
What is the relationship between total cost and total production?
As production increases, we add variable costs to fixed costs, and the total cost is the sum of the two. The figure below graphically shows the relationship between the quantity of output produced and the cost of producing that output.
What is the cost of these factors of production?
The cost of these factors of production are as follows: 1. Each worker costs the firm $4,000 per month. 2. Each acre of land costs the firm $1,000 per month. 3. Each machine costs the firm $600 per month.
What does the cost of a product depend on?
We mentioned that the cost of the product depends on how many inputs are required to produce the product and what those inputs cost. We can answer the former question by looking at the firm’s production function.
How do you derive the cost function from production function?
We derive the cost function from the production function, the prices of the inputs, and the target output. For a Leontief production function, the cost function is simply the sum of the cost of the inputs (quantity of each input times the price of that input) required to product the target output.
What is the relationship between the production function and the cost curves?
Assuming that factor prices are constant, the production function determines all cost functions. The variable cost curve is the constant price of the variable input times the inverted short-run production function or total product curve, and its behavior and properties are determined by the production function.
What is the difference between production and cost?
Manufacturing Costs: An Overview. Production costs reflect all of the expenses associated with a company conducting its business while manufacturing costs represent only the expenses necessary to make the product. Both of these figures are used to evaluate the total expenses of operating a manufacturing business.
What is the relationship between volume of production and cost of production?
Variable costs are costs that change with the changes in the level of production. That is, they rise as the production volume increases and decrease as the production volume decreases.
What is the relationship between production and costs including average and marginal costs?
The average cost is the sum of the total cost of goods divided by the total number of goods, whereas the Marginal Cost increases in producing one more unit or additional unit of product or service. Marginal cost changes in the total cost of production upon the change in output that changes the quantity of production.
What is the relationship between total product and total cost?
Finally, when total product is increasing at an increasing rate the total cost is increasing at a decreasing rate. When total product is increasing at a decreasing rate, the total cost is increasing at an increasing rate.
Which cost has direct relation with the production units?
Answer: Key Takeaways. Direct costs are expenses that can be directly tied to the production of a product and can include direct labor and direct material costs. Direct costs can be fixed costs such as the rent for a production plant.
What is the relationship between production and cost in economic analysis?
Production and Costs. We've explained that a firm's total costs depend on the quantities of inputs the firm uses to produce its output and the cost of those inputs to the firm. The firm's production function tells us how much output the firm will produce with given amounts of inputs.
What is production and cost analysis?
Cost Analysis. A production function tells us how much output a firm can produce with its existing plant and equipment. The level of output depends on prices and costs. The most desirable rate of output is the one that maximizes total profit that is the difference between total revenue and total cost.
Is production a cost?
The term "cost of production" refers to all the costs that are involved when a company offers a service or manufactures a product. Production costs are comprised of various expenses, including the cost of materials, employee wages, factory maintenance, shipping costs and more.
What is the relationship between total cost and marginal cost?
The Relationship Between Total Cost and Marginal Cost is that “the marginal cost is the addition to total cost when one more unit of output is produced”. When TC rises at a diminishing rate, MC declines. As the rate of increase of TC stops diminishing, MC is at its minimum point.
What is the relationship between marginal product and average product?
Marginal product is the change in total product divided by the change in quantity of resources (or inputs). Average product is the total product divided by the quantity of economic resources (or inputs). The average product reaches its peak when it intersects the marginal product curve.
What is the relation between MC and AC?
The relationship between MC and AC can be stated as under: (i) When AC falls with increase in output, MC is lower than AC, i.e., MC curve lies below the AC curve. Actually, MC rises earlier than AC. (ii) When AC rises with increase in output, MC is higher than AC, i.e., MC curve lies above the AC curve.
How do variable costs increase or decrease with output?
The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output. We treat labor as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours.
What is explicit cost?
Explicit costs are out-of-pocket costs, that is, actual payments. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs. Implicit costs are more subtle, but just as important. They represent the opportunity cost of using resources that the firm already owns.
What is the difference between a diminishing marginal return and an economy of scale?
However, diminishing marginal returns refers only to the short-run average cost curve, where one variable input (like labor) is increasing, but other inputs (like capital) are fixed. Economies of scale refers to the long-run average cost curve where all inputs are allowed to increase together. Thus, it is quite possible and common to have an industry that has both diminishing marginal returns when only one input is allowed to change, and at the same time has economies of scale when all inputs change together to produce a larger-scale operation.
What is economic profit?
Economic profit is total revenue minus total cost, including both explicit and implicit costs. The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit.
What is the economy of scale?
Many industries experience economies of scale. Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. This is the idea behind “warehouse stores” like Costco or Walmart. In everyday language: a larger factory can produce at a lower average cost than a smaller factory. This means that an increase in output can lead to a decrease in the average total cost.
Why are economies of scale important?
Other reasons economies of scale exist in the long-run are: 1 Discounts associated with buying in greater quantities. 2 Allows for more worker specialization. (Smaller firms typically have a lot of utility people that need to perform many, diverse actions.) 3 Greater bargaining power with suppliers (permitting lower supply costs.)
What is the relationship between productivity and cost of production?
What is the relationship between productivity and the cost of production? The relationship between productivity and the cost of production is your cost per day or per hour compared to your productivity. By examine these two things together. The productivity which is your output for the amount of hours worked compared to the total cost of a certain item – you will be able to reach a “break even analysis” showing you how much you need to a make minus the total coast to make a certain amount of money.
What is educational productivity?
Educational productivity is the improvement of students outcomes with little or no additional financial resources, or a consistent level of student performance at a lower level of spending. Educational productivity is based on effectiveness. This is the linkage between student outcomes and the level and use of financial resources in the schools. Production functions are concerned with how money is ...
What happens to average variable cost when inputs are fixed?
But with some inputs fixed, the decreasing average products will gradually outweigh those that are rising, and average variable cost will start rising . Ultimately, all average products must diminish since the usage of some inputs is fixed.
What is marginal change?
Marginal changes are all that matter when making such apparently unprofitable decisions. The point is, therefore, when making decisions about changes, only marginal cost should be considered. Fixed cost is irrelevant. Economics, Microeconomics, Relation, Short-Run Costs and Production.
Explicit and Implicit Costs, and Accounting and Economic Profits
Production in The Short-Run
- From: https://openstax.org/details/books/principles-microeconomics-2e (Chapter 7.2) In this chapter, we want to explore the relationship between the quantity of output a firm produces, and the cost of producing that output. We mentioned that the cost of the product depends on how many inputs are required to produce the product and what those inputs...
Production in The Long-Run
- From: https://openstax.org/details/books/principles-microeconomics-2e(Chapter 7.4) In the long run, all factors (including capital) are variable, so our production function is Q=f[L,K]Q=f[L,K] Consider a pizza restaurant that has one pizza oven. They can produce more or less pizza based on the number of employees. If they expect to be busy, they can have more people work that day. This is illustrated in the table below: What if a festival is in town …
Costs in The Long-Run
- From: https://openstax.org/details/books/principles-microeconomics-2e(Chapter 7.5) Re-consider the long-run production function in the previous section. Suppose that we want to produce 100 pizzas. We can accomplish this in more than one way. This is shown in the table below. There is also a larger point here: there are no fixed costs in the long-run. This is because we have control over both labor and capital, so all costs are variable. A firm can …