Costs of Production
Costs of production refer to the expenses incurred by a firm in the process of manufacturing goods or providing services. These costs typically include expenses such as labor, raw materials, and overhead. Understanding and managing costs of production is crucial for businesses to determine pricing strategies, maximize profits, and make informed decisions about production levels.
6 Key excerpts on "Costs of Production"
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Chapter 3 The Costs of Production Photo 3.1 The Costs of Production Source: cosma/Shutterstock Abstract This chapter discusses the major motivating force behind all market-based economic behavior: profits. The economic concept of opportunity cost is highlighted, with examples of the next best alternative in professional and personal decision-making. A clear distinction between accounting profits and economic profits is described and explained. Special attention is given to cost relationships, including constant, decreasing, and increasing cost curves, and how they relate to production in real-world examples such as Walmart, feedlots, forestry, and meat packing plants. 3.1 Profits The study of production assumes that the goal of a business enterprise in a market-based economy is to maximize profits. This assumption applies to all firms, whether they are large multinational corporations, such as Amazon or Cargill, or small family-owned businesses, such as a family farm in Delaware or a family restaurant in Salem, Oregon. The study of Costs of Production begins with a simple definition of profits and how the level of profits relates to the Costs of Production. In the simplest possible form, this relationship can be written as: (3.1) π = TR – TC. Total revenue (TR) refers to how much money a firm earns from the sale of its output (Y). Multiplying the number of units of output (Y) by the per-unit price of the output (P) yields total revenue: (3.2) TR = P * Y. The units for TR are in dollars, since output (Y) times price (USD/Y) is in terms of dollars. The units of output cancel each other. The level of total costs (TC) measures the payments that a firm must make to purchase the factors of production. The production of a good or service transforms inputs into outputs. These inputs are not free, but require payments, because they are scarce...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...3 The Costs of Production Plate 3.1 The Costs of Production Synopsis This chapter discusses the major motivating force behind all market-based economic behavior: profits. The economic concept of opportunity cost is highlighted, with examples of the next-best alternative in professional and personal decision making. A clear distinction between accounting profits and economic profits is described and explained. Special attention is given to cost relationships, including constant, decreasing, and increasing cost curves, and how they relate to production in real-world examples such as Walmart, feedlots, forestry, and meat packing plants. 3.1 Profits The study of production assumes that the goal of a business enterprise in a market-based economy is to maximize Profits. This assumption applies to all firms, whether they are large multinational corporations such as Microsoft or Cargill, or small family-owned businesses such as a family farm in Delaware or a family restaurant in Salem, Oregon. The study of Costs of Production begins with a simple definition of profits and how the level of profits relates to the Costs of Production. In the simplest possible form, this relationship can be written as: (3.1) π = TR – TC. Profits [r] = Total Revenue minus Total Costs. π = TR – TC (see Accounting Profits and Economic Profits). Total Revenue (TR) refers to how much money a firm earns from the sale of its output (Y). Multiplying the number of units of output (Y) by the per-unit price of the output (P) yields total revenue: (3.2) TR = P*Y. The units for TR are in dollars, since output (Y) times price (USD/Y) is in terms of dollars. The units of output cancel each other. The level of Total Costs (TC) measures the payments that a firm must make to purchase the factors of production. The production of a good or service transforms inputs into outputs. These inputs are not free, but require payments, because they are scarce...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...7–15. Short-Run Production Costs If you ask managers about the competitiveness of their firms, their answers are likely to bring up costs. Costs are an extension of the production process. To illustrate, assume that General Motors pays its workers $40 an hour and that 30 hours of labor are required to assemble a vehicle. The cost of assembly totals $1,200 per vehicle ($40 × 30 = $1,200). Suppose that improving technology results in a 10-percent increase in labor productivity—only 27 hours of labor are now required to assemble a vehicle. Assembly costs now total $1,080 ($40 × 27 = $1,080) per vehicle. In this manner, higher worker productivity results in lower production costs and thus increased profits for General Motors. Higher productivity would also result in increased wages for General Motors workers if they could capture some of the productivity gains as higher wages. Total Fixed, Total Variable, and Total Costs Let us consider the hypothetical costs that Hewlett-Packard (HP), a manufacturer of computer printers, realizes in the short run when it employs both fixed inputs and variable inputs. First, we will consider the fixed costs of HP. Total fixed cost is the sum of all costs that do not vary with output. Managers often refer to fixed costs as overhead costs. They include such things as the cost of machinery, lease payments on some equipment, rent on a building, property taxes, and interest payments on a loan. The monthly value of HP’s fixed inputs represents its monthly fixed cost. We see in column 2 of Table 4.2 that the firm’s total fixed costs are $50. In Figure 4.2 (a), total fixed cost is shown by the horizontal line at $50. Fixed costs remain constant no matter how many printers are produced. Table 4.2 Hypothetical Cost Schedules for HP Printers in the Short Run Quantity Produced per Day Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal...
eBook - ePub- Curtis M Jolly, Howard A Clonts(Authors)
- 2020(Publication Date)
- CRC Press(Publisher)
...Chapter 5 Cost of Production When the fish farmer decides to engage in production, the resource requirements and the price of those resources must be determined. Resources have many uses, but when a given set of resources, say land and labor, is used to produce fish, it cannot be used at the same time in the production of corn. If the resources used to produce fish had only one alternative use — the production of corn — the value of resources used to produce a specific amount of fish would be the value of those same resources in corn production. If, however, the resources required to produce the fish could be used to produce many different things, their value is derived from the most highly valued product that cannot be produced, because the resources are used for fish production. In other words, the cost of anything is the value of the best alternative given up in order to get that thing. The sacrificed alternative is referred to as the opportunity cost. The alternative or opportunity cost of producing one pound of fish is also called the social cost of production. If there were a market for the value of resources used in the production of a good, the social costs would equal the sum of the payments for the resources used. The total Costs of Production, therefore, consist of those payments necessary to attract and keep the factors of production attached to the farm or firm, including the human resources of the entrepreneur. The total cost of production is often divided into explicit and implicit costs. Explicit costs are accounting expenses. The money payments for fertilizer, fingerlings, chemicals, feed, and other inputs are explicit costs. Explicit costs also include payments for fixed assets, depreciation, and losses incurred in production. Implicit costs are opportunity costs that are not reflected in the farmer’s accounting statement. These costs must be considered in developing countries where labor use is intensive...
eBook - ePubPrinciples of Political Economy
Abridged with Critical, Bibliographical, and Explanatory Notes, and a Sketch of the History of Political Economy
- John Stuart Mill, J. Laurence (James Laurence) Laughlin, (Authors)
- 2009(Publication Date)
- Perlego(Publisher)
...Chapter II. Ultimate Analysis Of Cost Of Production. § 1. Of Labor, the principal Element in Cost of Production. The component elements of Cost of Production have been set forth in the First Part of this inquiry. 214 The principal of them, and so much the principal as to be nearly the sole, was found to be Labor. What the production of a thing costs to its producer, or its series of producers, is the labor expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labor may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay. At the first glance, indeed, this seems to be only a part of his outlay, since he has not only paid wages to laborers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labor and capital; and their value, like that of the article to the production of which they are subservient, depends on cost of production, which again is resolvable into labor. The cost of production of broadcloth does not wholly consist in the wages of weavers; which alone are directly paid by the cloth-manufacturer. It consists also of the wages of spinners and wool-combers, and, it may be added, of shepherds, all of which the clothier has paid for in the price of yarn. It consists, too, of the wages of builders and brick-makers, which he has reimbursed in the contract price of erecting his factory. It partly consists of the wages of machine-makers, iron-founders, and miners. And to these must be added the wages of the carriers who transported any of [pg 265] the means and appliances of the production to the place where they were to be used, and the product itself to the place where it is to be sold. Confirmation is here given, in the above words, of the opinion that, in Mr...
- John Stuart Mill(Author)
- 2017(Publication Date)
- Madison & Adams Press(Publisher)
...3. Profits an element in Cost of Production Table of Contents Thus far of labor or wages as an element in cost of production. But in our analysis, in the First Book, of the requisites of production, we found that there is another necessary element in it besides labor. There is also capital; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the abstinence of all the persons by whom the remuneration of the different classes of laborers was advanced. The return from abstinence is Profit. And profit, we have also seen, is not exclusively the surplus remaining to the capitalist after he has been compensated for his outlay, but forms, in most cases, no unimportant part of the outlay itself. The flax-spinner, part of whose expenses consists of the purchase of flax and of machinery, has had to pay, in their price, not only the wages of the labor by which the flax was grown and the machinery made, but the profits of the grower, the flax-dresser, the miner, the iron-founder, and the machine-maker. All these profits, together with those of the spinner himself, were again advanced by the weaver, in the price of his material — linen yarn; and along with them the profits of a fresh set of machine-makers, and of the miners and iron-workers who supplied them with their metallic material. All these advances form part of the cost of production of linen. Profits, therefore, as well as wages, enter into the cost of production which determines the value of the produce....
