Chapter 21
Election
Issues center on economics.
Economists
Critique America's Education
3 Free
Business Book Summaries
Including New York Times Bestsellers
I. Introduction
A. The last two chapters were an in-depth
exploration of demand.
B. This chapter will explore costs, the key
determinate of supply.
C.
Math Review is a short dynamic review of
basic math skills for microeconomics from
R. L. Reynolds of Boise St. University.
II. Understanding costs
A. Costs
are the dollars paid for the factors of production.
B. Opportunity
cost is the value of the best alternate use, e.g., the
opportunity cost of labor is the value that
could have been received
from using capital.
C. Explicit costs versus implicit
costs
1. Explicit
costs require an out-of-pocket expenditure, e.g., wages,
materials, and overhead.
2.
Implicit costs do not require an outlay, e.g.,
forgone interest on invested capital, forgone rent a company could receive by renting a facility used
in the business,
forgone wages for uncompensated efforts by family members
in a family-operated business, forgone entrepreneurial income you
could earn by
managing another business. Included a normal return on investment, which is the minimum amount
required to keep resources
employed at their current use.
D. Short run versus long run costs
1. In the short
run costs are both fixed and variable.
a.
Fixed costs do not vary with production, e.g.,
plant and equipment, property taxes, most overhead, etc.
b.
Variable costs vary directly with
production, e.g., labor and materials
c.
Marginal cost is the change in total costs
which results from making one more unit.
2. In the long
run all costs are variable as fixed costs may increase.
E. Diminishing returns:
1. Adding
a variable resource (labor) to a fixed resource (capital) will increase
production for a while.
2. At some
point the rate of
increase declines and eventually becomes negative.
3. Diminishing returns affect both
the production of labor and cost of production.
4. Example: When eating at my
mother's house I would say using three people to do the dishes didn't make sense
because the
third person just got in the way. She agreed so me and my sisters did the
dishes.
5.
Diminishing returns - Wikipedia
has additional information.
6.
Econ Concepts in 60 Seconds
Video on The Law of Diminishing Marginal Returns reviews
diminishing returns and previews section III on
labor productivity.
F. Accounting profits versus economic
profits
1. Accounting
profit is revenue minus explicit costs.
2. Economic
profit is revenue minus explicit plus implicit costs.
3 Since
implicit cost includes a payment for the risk factor part of interest and
payment for entrepreneurial skill.
4. This means
a.
Normal Profit is a cost to economists and paid for as an
explicit cost.
b. In the
long run competition causes economic profit to be zero.
c
For another explanation read the beginning of
