Lecture 4. Topic 4 Costs of production. Fundamentals of Economic Theory Yevgeniy M. Orel, C.Sc.(Econ.), Docent, Faculty of Economic Science, NaUKMA

Thursday, July 23, Outline of the presentation (Topic 4) Types of costs Economic costs Accounting profit and economic profit Production costs in the short run and in the long run The law of diminishing returns and its mirror: The law of increasing opportunity cost Average and marginal productivity Economies/diseconomies of scale

Thursday, July 23, Types of costs Fixed and variable costs Total and average costs Explicit and implicit costs Accounting and economic costs

Thursday, July 23, Fixed and variable costs Fixed costs (постійні витрати, фіксовані витрати) Costs incurred irrespectively of the quantity of products produced Variable costs (змінні витрати) The costs of variable inputs, i.e. those changing with the output changed

Thursday, July 23, Total and average costs [1] Total cost (загальні витрати) Sum of all costs, fixed plus variable. Average total cost (середні витрати, собівартість) Total cost divided by output, i.e. the quantity of products produced

Thursday, July 23, Total and average costs [2] Average fixed costs (середні постійні витрати) Fixed costs divided by output Average variable cost (середні змінні витрати) Variable cost divided by output

Thursday, July 23, Explicit and implicit costs Explicit costs (Зовнішні (явні) витрати) the cost of resources, which do not initially belong to the entrepreneur. He/She has to pay for them from ones pocket. Implicit costs[1] (Внутрішні (неявні) витрати) the value of the entrepreneurs resources translated into the income he/she could receive, but has to forgo for the sake of another product. [1] Synonym: imputed costs.[1]

Thursday, July 23, Accounting and economic costs Accounting cost (бухгалтерські витрати) The cost of resources inputted in production. The resources the entrepreneur pays for. Economic cost (економічні витрати) Value of the most desirable economic goods (commodities and services) the entrepreneur has to forgo for the sake of the produce he/she intends to produce. (opportunity cost, economic cost, альтернативна вартість).

Thursday, July 23, Accounting profit and economic profit PROFIT (прибуток) the residual return to the entrepreneur. (Bannocks DoE) AQCCOUNTING PROFIT (бухгалтерський прибуток) is the difference between the total revenue and accounting (i.e. explicit) costs. ECONOMIC PROFIT[1] (економічний прибуток) is the difference between TR and economic costs. [1] Synonym: super-normal profit.[1]

Thursday, July 23, The law of diminishing returns The law of diminishing returns is mirrored by the law of increasing opportunity cost. As an extra unit of one resource is employed, with all others held constant, the output generated by each additional unit will eventually fall.

Thursday, July 23, Production costs in the short run and in the long run Shortest-run – no input use is changed. All costs are fixed. Short-run – one or more inputs are variable, but at least one is fixed. Long-run – there is enough time to provide respective adjustments. All costs are variable.

Thursday, July 23, Economies/diseconomies of scale [1] Economies of scale (зростаючий ефект масштабу) – output grows in a larger proportion than do all inputs

Thursday, July 23, Economies/diseconomies of scale [2] Constant return to scale (постійна віддача від масштабу) – output grows in the same proportio as inputs do

Thursday, July 23, Economies/diseconomies of scale [3] Diseconomies of scale (відємний ефект масштабу) – output grows in a smaller proportion than do all inputs

Thursday, July 23, Дякую за увагу! Thank you for attention!