Economic Costs o Economic costs are the payments a firm must make, or incomes it must provide, to resource suppliers

to attract those resources away from their best alternative production opportunities. Payments may be explicit or implicit Explicit costs are payments to non-owners for resources they supply. In the texts example this would include cost of the T-shirts, clerks salary, and utilities, for a total of !",###. Implicit costs are the money payments the self-employed resources could have earned in their best alternative employments. In the texts example this would include for$one interest, for$one rent, for$one wa$es, and for$one entrepreneurial income, for a total of "",###. %ormal profits are considered an implicit cost because they are the minimum payments re&uired to keep the owners entrepreneurial abilities self-employed. This is ',### in the example. Economic profits are total revenue less all costs (explicit and implicit includin$ a normal profit). The short run is the time period that is too brief for a firm to alter its plant capacity. The plant si*e is fixed in the short run. +hort-run costs, then, are the wa$es, raw materials, etc., used for production in a fixed plant. The lon$ run is a period of time lon$ enou$h for a firm to chan$e the &uantities of all resources employed, includin$ the plant si*e. ,on$-run costs are all costs, includin$ the cost of varyin$ the si*e of the production plant. +hort-run production reflects the law of diminishin$ returns that states that as successive units of a variable resource are added to a fixed resource, beyond some point the product attributable to each additional resource unit will decline. Total product (TP) is the total &uantity, or total output, of a particular $ood produced. -ar$inal product (-P) is the chan$e in total output resultin$ from each additional input of labor. .vera$e product (.P) is the total product divided by the total number of workers. o /hen mar$inal product be$ins to diminish, the rate of increase in total product stops acceleratin$ and $rows at a diminishin$ rate. The avera$e product declines at the point at which the mar$inal product slips below avera$e product. Total product declines when the mar$inal product becomes ne$ative.

o o

Short-Run Production Relationships o

The law of diminishin$ returns assumes all units of variable inputs0workers in this case 0are of e&ual &uality. -ar$inal product diminishes not because successive workers are inferior but because more workers are bein$ used relative to the amount of plant and e&uipment available.

Short-Run Production Costs 1ixed costs are those costs whose total does not vary with chan$es in short-run output. 2ariable costs are those costs which chan$e with the level of output. They include payment for materials, fuel, power, transportation services, most labor, and similar costs. Total cost is the sum of total fixed and total variable costs at each level of output

Per unit or avera$e costs

.vera$e fixed cost is the total fixed cost divided by the level of output (T1345). It will decline as output rises.

.vera$e variable cost is the total variable cost divided by the level of output (.23 6 T2345).

.vera$e total cost is the total cost divided by the level of output (.T3 6 T345), sometimes called unit cost.

-ar$inal cost is the additional cost of producin$ one more unit of output (-3 6 chan$e in T34chan$e in 5). -ar$inal cost can also be calculated as -3 6 chan$e in T234chan$e in 5. -ar$inal decisions are very important in determinin$ profit levels. -ar$inal revenue and mar$inal cost are compared. -ar$inal cost is a reflection of mar$inal product and diminishin$ returns. /hen diminishin$ returns be$in, the mar$inal cost will be$in its rise

3ost curves will shift if the resource prices chan$e or if efficiency chan$es.