Port said university Faculty of commerce

Production cost

Student Name: Ahmed Salah Salama Abdel Maksoud level: third

Student ID: 5805 section: ‫انتظام‬

Course Name: commercial studies

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 - Introduction.
 The cost of production :
The cost of production theory of value is the theory that the price
of an object or condition is determined by the sum of the cost of the
resources that went into making it .the cost can comprise any of the
factors of production ( including labor, capital, or land ) and taxation.

The theory makes the most sense under assumptions of constant

returns to scale and the existence of just one non produced factor of
production.

These are the assumptions of the so called non substitution theorem

( clarification needed ).

The meaning production function:

The production function shows the relationship between quantity

of inputs used to make a good and the quantity of output of that good

Relationship between marginal cost and average total cost :

1- Whenever marginal cost is less than average total costs, average

total cost is falling.
2- Whenever marginal cost is greater than average total cost, average
total cost is rising.

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Subject…

Definition of demand and supply :

Supply and demand are two words that economists use

most often.

They are forces that make market economies work

Modern microeconomics is about supply, demand, and

market equilibrium.

the law of demand :

Is defined as the negative relationship between price of main good

as independent variable and quantity demanded as a dependent variable .

As the higher in price of the main good or service will lead to a

decrease in quantity demanded .

But the fall in price will lead to an increase in quantity demanded

(Negative relationship).

According to the law of Supply :

1. Firms are willing to produce and sell a greater quantity of a good

when the price of the good is high.
2. This results in a supply curve that slopes upward.
3. The economic goal of the firm is so maximize profits.
4. Profit is the firm is total revenue minus its total cost.
5. Profit = total revenue – total cost.

Another meaning of demand and supply:

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- In microeconomics, supply and demand is an economic model of price
determination in a market.
- It postulation that holding all else equal in a competitive market .
- The unit price for a particular good , or other traded item such as labor
or liquid .
Economic profit versus accounting profit:

The production function :

The production function shows the relationship between quantity

of inputs used to make a good and the quantity of output of that good.

Marginal product:

the marginal product of any input in the production process is the

increase in output that arises from an addition unit of that input .

diminishing marginal product:

Diminishing marginal product is: the property whereby the

marginal product of an input declines as the quantity of the input
increases.

The various measures of cost

Costs of production may be divided into fixed costs and variable

costs.

Fixed and variable cost .

Fixed costs:

Are those costs that do not vary with the quantity of output
produced .

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Variable costs:

Are those costs that do vary with the quantity of output produced.

Fixed and total costs:

Total cost :

1- Total fixed costs (TFC)

2- Total variable costs (TVC)
3- Total costs (TC)
4- TC = TFC + TVC
 Average costs :
- Average costs can be determined by dividing the firm is costs by the
quantity of output it produces.
- The average costs is the cost of each typical unit of product.
- Average costs :
1- Average fixed costs (AFC)
2- Average variable costs (AVC)
3- Average total costs (ATC)
4- ATC = AFC + AVC
 Marginal costs :
- Marginal costs measures: the increase in total costs that arises from an
extra unit of production.
- Marginal costs help answer the following question :
How much does it cost to produce an additional unit of
output?
 Cost curves and their shapes:
- marginal cost rises with the amount of output produced.
- this reflects the property of diminishing marginal product .

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 - the average total cost curve is U shaped
- at very low levels of output average total cost is high
because fixed cost is spread over only a few units .
- the bottom of the U-shaped ATC curve occurs at the
quantity that minimizes average total cost .
- this quantity is some times called the efficient scale of the
firm .
 Relationship between marginal cost and average total
cost :
3- Whenever marginal cost is less than average total costs, average
total cost is falling.
4- Whenever marginal cost is greater than average total cost, average
total cost is rising.
 Typical cost curves :
it is now time to examine the relationships that exist
between the different measures of cost .
 Three important properties of cost curves :
- Marginal cost eventually rises with the quantity of output.
- The average total cost curve is U shaped.
- The marginal cost curve crosses the average total cost curve at the
minimum of average total cost.
 Costs in the short run and in the long run :
For many firms, the division of total costs between fixed and variable
costs depends on the time horizon being considered.

- In the short run, some costs are fixed .

- In the long run, fixed costs become variable costs.
 Economies and diseconomies of scale :

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- Economies of scale refer to the property whereby long run average
total cost falls as the quantity of output increases.
- Diseconomies of scale refer to the property whereby long run average
total cost rises as the quantity of output increases.
- Constant returns to scale refers to the property whereby long.
Run average total cost stays the same as the quantity of
output increases.
 The cost of production :
The cost of production theory of value is the theory that the price of an
object or condition is determined by the sum of the cost of the resources
that went into making it . the cost can comprise any of the factors of
production ( including labor, capital, or land ) and taxation.

The theory makes the most sense under assumptions of constant

returns to scale and the existence of just one non produced factor of
production .

 Market price :
Market price is a familiar economic concept : it is price that a good or
service is offered at ,or will fetch , in the marketplace.

It is of interest mainly in the study of microeconomics .

 Factors affecting costs of production :

Factors affecting costs of production wage costs .for labor intensive
industry ( service sector, manufacturing of clothes ) as mall change in
wage costs has big impact on the overall costs of firms.

Labor productivity. New technology which improves output per worker

enables the firm to cut back on employing worker, leading to lower costs.

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Conclusion

- Definition of demand and supply.

Supply and demand are two words that economists use most often .

They are forces that make market economies work .

 According to the law of Supply:

- Firms are willing to produce and sell a greater quantity of a good
when the price of the good is high .
- This results in a supply curve that slopes upward .
- The economic goal of the firm is so maximize profits .
Profit = total revenue – total cost.

 The production function :

- The production function shows the relationship between quantity of
inputs used to make a good and the quantity of output of that good .
 Three important properties of cost curves :
- Marginal cost eventually rises with the quantity of output.
- The average total cost curve is U shaped.
- The marginal cost curve crosses the average total cost curve at the
minimum of average total cost.
Sources

1- Dr.Basma el hariay , Dr.Jihan Awad Dr.wael Ghonim

,commercial studies
2- Dr .Gamal Attia , Econeomic terminology
3- economic terminology
) ‫(دكتور جمال عطية جامعة حلوان‬
4- https://www.investopedia.com/terms/p/production-cost.asp
5- https://www.readyratios.com/reference/accounting/production_cost.html

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