The Cost of Production
| Introduction -- Reading Assignment -- Discussion -- Lesson Assignments -- Answer Sheet -- Assignment Submission Directions |
This lesson identifies the various production costs facing producers. It explains variable and fixed costs, and illustrates how they are used to explain the differences between short-term and long-term production functions.
In the short run, some factors of production are fixed (e.g., capital) and some are flexible (e.g., labor). Due to diminishing returns of factors of production in the short run, the marginal cost of production eventually starts rising. The average cost curve in the short run has a U-shape.
In the long run, all factors of production are flexible, including capital. The firm in the long run chooses its production plant using various levels of factors of production to minimize its costs. Firms can experience economies of scale as a result of specialization. If this is the case, the long-run average cost curve has a negative slope as the per-unit cost of production continues to decline. The minimum efficient scale is reached when a firm can no longer benefit from economies of scale. After that point, a firm may experience diseconomies of scale if the price of inputs starts rising.
Lesson Objectives
After completing this lesson, you should be able to:
- distinguish between accounting profit and economic profit;
- understand production costs in the short run;
- understand production decisions in the short run;
- understand production and costs in the long run;
- understand the concepts of economies of scale, minimum efficient scale, and diseconomies of scale.
