Cost of Production

Resources that are used for production of goods and services are productive, scarce and have alternative use.

The opportunity cost of a good is the amount of another product given up to produce it.

Economic Costs are resources payments made to attract resources away from alternative uses i.e. Explicit costs; payments made to resource owners and Implicit Costs; cost of using self-owned, self-employed resources.

Cost of production can be short run or long run.

Short Run

Short run is a period which is too short for a firm to change its plant capacity yet longs enough for the company to change the degree to which fixed plant is used. So short run is called fixed plant period. The firm can change its output by using smaller or larger amounts of labor, materials and other resources. It can use its existing plant capacity more or less intensively in the short run. If Boeing hires 100 workers for one of its commercial airline plants or adds another extra shift of workers this is called short run adjustment. If it adds another production facility or installs more equipment it is called long run adjustment.

Long Run

From the point of view of existing firm long run is the period which is long enough for it to change the quantities of all the resources it uses including the plant size, which means that it can add another plant. From the point of view of industry long run is the period in which new firm can enter industry and existing firm can leave industry. It is important to remember that short and long run are not calendar period these are conceptual periods.

business economics

March 08, 2019