The costs of production. Income from factors of production

1. The costs of production. Income from factors of production

JSC "Astana Medical University"
Department of History of Kazakhstan and Philosophy
Sws
THE COSTS OF
PRODUCTION. INCOME
FROM FACTORS OF
PRODUCTION
Prepared by Salimova Aliya,
131 group GM,
Tutor: Bektaeva I.B.
Astana, 2016

2. Content

1.Economic Costs
2.Accounting Profit and Normal Profit
3.Short Run and Long Run
4.Per-Unit, or Average, Costs
5.Economies and Diseconomies of Scale
6.Conclusion
7.Reference
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3. Economic Costs

•The payment that must be made to obtain
and retain the services of a resource
•Explicit Costs
• Monetary payments
•Implicit Costs
• Value of next best use
• Self-owned resources
• Includes normal profit
3

4. Accounting Profit and Normal Profit

•Accounting profit
= Revenue – Explicit Costs
•Economic profit
= Accounting Profit – Implicit Costs
•Economic profit (to summarize)
=Total Revenue – Economic Costs
=Total Revenue – Explicit Costs – Implicit
Costs
4

5. Economic Profit

Implicit costs
(including a normal
profit)
Explicit
costs
Accounting profit
Total Revenue
Economic
(Opportunity)
Costs
Economic
profit
Accounting costs
(explicit costs only)
5

6. Short Run and Long Run

•Short Run
• Some variable inputs
• Fixed plant
•Long Run
• All inputs are variable
• Variable plant
• Firms enter and exit
6

7. The Law of Diminishing Returns

Total Product, TP
The Law of Diminishing Returns
30
TP
20
10
0
Marginal Product, MP
1
20
2
3
Increasing
Marginal
Returns
4
5
6
7
8
9
Negative
Marginal
Returns
Diminishing
Marginal
Returns
10
AP
1
2
3
4
5
6
7
8 9
MP
7

8. Short-Run Production Relationships

•Total Product (TP)
•Marginal Product (MP)
Marginal Product
Change in Total Product
= Change in Labor Input
•Average Product (AP)
Average Product
=
Total Product
Units of Labor
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9. Short-Run Production Costs

•Fixed Costs (TFC)
• Costs do not vary with output
•Variable Costs (TVC)
• Costs vary with output
•Total Costs (TC)
• Sum of TFC and TVC
• TC = TFC + TVC
9

10. Short-Run Production Costs

$1100
TC
1000
900
TVC
800
Costs
700
600
Fixed
Cost
500
400
Total
Cost
300
200
Variable
Cost
100
0
TFC
1
2
3
4
5
6
7
8
9
10
Q
1

11. Long-Run Production Costs

•The firm can change all input amounts,
including plant size.
•All costs are variable in the long run.
•Long run ATC
• Different short run ATCs
1

12. The Long-Run Cost Curve

Average Total Costs
ATC-1
ATC-5
ATC-2
ATC-3
ATC-4
Long-Run
ATC
Output
1

13. Per-Unit, or Average, Costs

•Average Fixed Costs AFC = TFC/Q
•Average Variable Costs AVC = TVC/Q
•Average Total Costs
ATC = TC/Q
•Marginal Costs
MC = ΔTC/ΔQ
1

14. Per-Unit, or Average, Costs

$200
Costs
150
ATC
AVC
100
AFC
50
AVC
AFC
0
1
2
3
4
5
6
7
8
9
10
Q
1

15. Economies and Diseconomies of Scale

•Economies of scale
• Labor specialization
• Managerial specialization
• Efficient capital
• Other factors
•Constant returns to scale
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16. Economies and Diseconomies of Scale

•Diseconomies of scale
• Control and coordination problems
• Communication problems
• Worker alienation
• Shirking
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17. Conclusion

The costs related to making or acquiring
goods and services that directly generates
revenue for a firm. It comprises of direct
costs and indirect costs. Direct costs are
those that are traceable to the creation of a
product and include costs for materials and
labor whereas indirect costs refer to those
costs that cannot be traced to the product
such as overhead.
1

18. Reference

• Donald F. Gordon, "What was the Labor Theory
of Value"
• The basis of economic theory
• Arthur V. Kozneyev, "The book for economic
leader"
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