5.2 Costs in the Short Run
Measuring costs of production
Opportunity Cost: The cost of the next best alternative forgone.
Explicit Costs: Payments to outside suppliers of inputs.
The opportunity cost of using factors not already owned by a firm is the price that the firm
has to pay for them. (Example: The opportunity cost of using £100 worth of electricity, is
£100. The firm has sacrificed £100 which they could have used on something else.)
Implicit Costs: Costs that do not involve payment to a third party, but nonetheless involve a
sacrifice of some alternative.
The opportunity cost of using factors owned by a firm is the price of the factor if it were used
in an alternative way. (Examples: If a firm owns buildings, the opportunity cost would be the
rent earned if they let another firm use their buildings. If a firm draws out £10000 from the
bank in order to invest in new equipment, the opportunity cost would not only be the £10000
(explicit cost) but also the interest they could had kept/ interest it thereby forgoes (implicit
cost).
Historic Cost: The original amount that the firm aid for factors it now owns.
When a firm paid for a machine, its historic cost is irrelevant. Not using the machine won’t
bring that money back. These are sometimes referred as ‘sunk costs’ (costs that has already
been incurred and cannot be recovered).
Costs and inputs
A firms cost of production is dependent on the factors of production they use. More precisely
they are considered about 2 things:
1. The productivity of the factors – the more productive the factor is the smaller the
quantity of them required to produce a given level and thus the lower the cost of that
output will be (i.e. there is a direct link between TPP, APP and MPP).
2. The price of the factors – the greater the price of the factor, the greater the cost of
production.
In the short-run, some factors are fixed in suppled (fixed factors). Their TPP does not
change and thus they do not vary in output. The TPP of variable factors does vary with
output.
Total Cost
Total Cost ( TC )=Total Variable Cost (TVC )+Toal ¿ Cost (TFC )
Average and Marginal Costs
Average Cost: The cost per unit of production (e.g. the cost to produce each potato).
Average Cost ( AC)=Total Cost (TC)/Quantity (Q)
Average ¿ Cost =Total ¿ Cost /Quantity
Average Variable Cost =Total Variable Cost /Quantity
Marginal Cost: The cost of producing one more unit of the factor involved.
Measuring costs of production
Opportunity Cost: The cost of the next best alternative forgone.
Explicit Costs: Payments to outside suppliers of inputs.
The opportunity cost of using factors not already owned by a firm is the price that the firm
has to pay for them. (Example: The opportunity cost of using £100 worth of electricity, is
£100. The firm has sacrificed £100 which they could have used on something else.)
Implicit Costs: Costs that do not involve payment to a third party, but nonetheless involve a
sacrifice of some alternative.
The opportunity cost of using factors owned by a firm is the price of the factor if it were used
in an alternative way. (Examples: If a firm owns buildings, the opportunity cost would be the
rent earned if they let another firm use their buildings. If a firm draws out £10000 from the
bank in order to invest in new equipment, the opportunity cost would not only be the £10000
(explicit cost) but also the interest they could had kept/ interest it thereby forgoes (implicit
cost).
Historic Cost: The original amount that the firm aid for factors it now owns.
When a firm paid for a machine, its historic cost is irrelevant. Not using the machine won’t
bring that money back. These are sometimes referred as ‘sunk costs’ (costs that has already
been incurred and cannot be recovered).
Costs and inputs
A firms cost of production is dependent on the factors of production they use. More precisely
they are considered about 2 things:
1. The productivity of the factors – the more productive the factor is the smaller the
quantity of them required to produce a given level and thus the lower the cost of that
output will be (i.e. there is a direct link between TPP, APP and MPP).
2. The price of the factors – the greater the price of the factor, the greater the cost of
production.
In the short-run, some factors are fixed in suppled (fixed factors). Their TPP does not
change and thus they do not vary in output. The TPP of variable factors does vary with
output.
Total Cost
Total Cost ( TC )=Total Variable Cost (TVC )+Toal ¿ Cost (TFC )
Average and Marginal Costs
Average Cost: The cost per unit of production (e.g. the cost to produce each potato).
Average Cost ( AC)=Total Cost (TC)/Quantity (Q)
Average ¿ Cost =Total ¿ Cost /Quantity
Average Variable Cost =Total Variable Cost /Quantity
Marginal Cost: The cost of producing one more unit of the factor involved.
