Cost is the most important consideration in production.
Revenue may be substantial but the producer will think twice because of the implication on the pricing of the commodity In efficiency in the production process has a direct impact on cost, because it takes away the incentives being rewarded by the market for producers that are not wasteful.
Accounting vs Economic Cost
Economic costs are forward looking costs, meaning, economist are in tune with future costs because these costs have major repercussions on the potential profitability of the firm. Economist are also giving emphasis on the so called opportunity costs, or cost that are incurred by not putting the resources to optimum use.
Sunk costs are costs that are irretrievable due to the
fact that these are already incurred and do not affect a firms decision. Accounting costs tend to be retrospective; they recognize costs only when these are made and properly recorded.
Economic costs are in tune with future costs that
have major repercussions on potential profitability of the firm. They give emphasis on the cost that are incurred by not putting the resources to optimum use. Whereas the accounting costs are costs that are properly recorded on a journal or ledger.
Implicit vs Explicit Costs
Explicit costs refers to the actual expenses of the firm in purchasing or hiring the inputs it needs. Implicit costs refers to the value of inputs being owned by the firm and used in its own production process.
Short-run Cost Analysis
Short-run is a time horizon during which one input is held constant. Short-run cost includes: a) Total cost the sum of fixed cost and variable cost b) Fixed cost cost that does not vary with output c) Variable cost cost that varies with output d) Average fixed cost total fixed costs divided by the number of output produced
e) Average variable cost total variable cost
divided by the number of output produced f) Average total cost total cost divided by the number of output produced g) Marginal cost refers to changes in total cost divided by the change in output produced
Long-run Cost Analysis
Long-run is a time period wherein all fixed factors can be variable. The long-run average total cost (LAC) of producing a given level of output is always the lowest point of the short-run average total cost of producing that output. The LAC is the curve tangent to each short-run average cost SAC representing different plant sizes that a firm can build in the long run.
Long-run Marginal Cost
The long-run marginal cost LMC measures the change in long-run total cost from a given change in output.
Business Profit vs Economic
Profit Business profit refers to the difference between total revenue and explicit cost. Economic profit is the difference between total revenue and both explicit and implicit costs.
Point of Maximum Profit
Useful rules to remember:
Total Revenue (TR) = Price (P) x quantity (Q) Profit ( = TR TC If,