Transcript CH. 7. 3 Production Creates Cost

CH. 7. 3
Production
Creates Cost
Costs
are incurred through
production—people have to be
paid.
Payments for the Factors of
Production:
Land = Rent
Labor = Wages
Capital = Interest
Entrepreneurship = Profit
Explicit
Cost = payments made to
others as a cost of running a
business.
EX: The Yuk-Yuk Family want to
open a business. They are going
to invest $50,000 of own savings
and $60,000 from the bank. The
business is called Tanny’s
Technology. The monthly costs,
or explicit costs, are as follows:
Tanny’s Technology estimated monthly
costs:
RENT
$1,200
LOAN
$1,500
WAGES TO
TECHNICIANS
$2000
ELECTRICITY
$200
TELEPHONE
$100
ADVERTISING
$160
Total $5,160
Opportunity
Costs or what you
forgot to put into your monthly
costs—in the Tanny’s case: they
forgot to include their own wages
and lost earnings in savings and
stocks. These are the opportunity
costs of running a business.
Costs
and Diminishing Marginal
Product (SR) = same as law of
supply—price goes up, quantity
supplied goes up. The price of
each product being sold also goes
up.
Relationship
between returns to
scale and cost of production (LR):
Increasing Decreasing Constant
returns to returns to returns to
scale
scale
scale
Production Production Production
costs
costs
costs stay
decrease increases the same
per unit
per unit
per unit