Production and Costs Important Questions for Class 12 Economics Concept of Cost Function. Cost Theory – Types of Costs Cost is minimized at the levels of capital and labor such that the marginal product of labor divided by the wage (w) is equal to the marginal product of capital divided by the rental price of capital (r).. More intuitively, you can think of cost being minimized and, by extension, production being most efficient when the additional output per dollar spent on each of the inputs is the same. The two important functions of a producer are production and costs. General Economics: Theory of Cost 23 Short Run Marginal Cost (MC) • Marginal Cost is the addition made to the Total Cost by Production of an Additional Unit of Output. Cost of Production DRAFT. Play . Explicit costs, also referred to as actual costs, include those payments that the employer makes to purchase or own the factors of production.These costs comprise payments for raw materials, interest paid on loans, rent paid for leased building or machinery and taxes paid to the government. An example of fixed and variable costs in equation format. The average cost is defined as total cost divided by the quantity of output (i.e. Thus, the difference between economic profits and accounting profits is that economic profits include the firm's implicit costs and accounting profits do not. In any business, production and cost are two pivotal processes regarding a business's success and profit. 1.Cost It refers to the expenditure incurred by a producer on the factor as well as non-factor inputs for a given amount of output of a commodity.. 2.Cost Function A cost function shows the functional relationship between output and cost of production. In other words, the cost of production per unit decreases as a company produces more units. 66% average accuracy. The shape of the cost curves in the short run reflects the law of diminishing returns.. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation.. We will apply the marginal decision rule to the production process and see how this rule ensures that production is carried out at the lowest cost possible. So, for Michael, 150 units per day is the optimal level of production where his production cost per unit will be minimum. Factors of production are the inputs needed for the creation of a good or service. Spell. Cost reducing innovations causing an outward shift in supply. The cobb douglas production function is that type of production function wherein an input can be substituted by others to a limited extent.. For example, capital and labour can be used as a substitute … 3 years ago. We will look at the different aspect of productions and the cost structure of the firm. Write. Match. Cost of production refers to the total sum of money needed for the production of a particular quantity of output. Roots of Modern Macroeconomics: 31. 2. Share practice link. As output increases, total variable cost rises. Day 1: Qty produced = 100 units, Production cost per unit = $ 3.50 Day 2: Qty produced = 150 units, Production cost per unit = $ 3.25 Day 3: Qty produced = 180 units, Production cost per unit = $ 3.40. Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output). In the Cost Theory, there are two types of costs associated with production – Fixed Costs and Variable Costs. by sbuckphs. In economics, production theory explains the principles in which the business has to take decisions on how much of each commodity it sells and how much it produces and also how much of raw material ie., fixed capital and labor it employs and how much it will use. • To indicate how the most profitable production level (optimum production) can be achieved. In the short-run, at least one factor of production is fixed, so firms face both fixed and variable costs. It is the act of creating an output, a good or service which has value and contributes to the utility of individuals. Explicit Cost: It refers to the actual money expenditure of a firm on purchasing goods or hiring factor services and non-factor inputs (like raw material, electricity, fuel, etc.) You need to be making sure that the cost of your production does not outweigh the money being brought in. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management required to produce a commodity. We examine the nature of production and costs in order to gain a better understanding of supply. Average Cost. In that case, your total costs of running your burger restaurant add up to USD 3’000 (i.e. In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. 1. Explicit costs . It is given as Terms in this set (15) Short Run. Economic profits are total revenues minus explicit and implicit costs. capital (premises) and labour (staff). A period of time during which at least one factor of production is fixed in supply e.g. cost of production Blogs, Comments and Archive News on Economictimes.com It represents money costs which we want to incur in order to acquire the factors of production". Economic Development in Historical Perspective: 27. Played 444 times. Test. As defined by Gulhrie and Wallace, “In Economics, cost of production features a special meaning. Answers to Economics Multiple Choice Questions are available at the end of the last question. Ordinarily, costs refer to the money expenses incurred by a firm in the production process. Variable costs (VC), also sometimes called direct costs, are the costs of the variable factors. Determining a level of production that generates the greatest level of profit is an important consideration, one that means paying attention to marginal costs, as well as marginal revenue, which is the increase in revenue arising from an increase in output. Solo Practice. Homework. STUDY. They vary directly as output changes. A period of time during which all the factors of production are variable in quantity e.g. Features a special meaning this chapter, relate to the average cost of production a! 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