Test: Production And Costs - 2 - UPSC

Cost of production is the total price paid for resources used to manufacture a product or create a service to sell to consumers including raw materials, labor, and overhead.

A firm has to pay for the inputs it needs. Therefore, inputs, on the one hand, generate costs and, on the other hand, generate output. We first study the relationship between inputs and the output; that is "production function". Then we look at the relationship between the output and costs; that is cost function.

Total cost is what the firm pays for producing and selling its products. Explicit costs are normal business expenses that are easy to track and appear in the general ledger. Explicit costs are the only costs necessary to calculate a profit, as they clearly affect a company's profits. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs. 

Implicit cost is actually the cost that is the consequence of using the assets, instead of lending, selling or renting them. It also means the income that is forgone from making a choice of not to work. Implicit cost is also known as implied cost, notional cost or imputed cost.

“Opportunity cost” of a resource, means the value of the next-highest-valued alternative use of that resource.
E.g. you spend time and money going to a movie, you cannot spend that time at home playing video games, and you cannot spend the money on something else. If your next-best alternative to seeing the movie is playing video games at home, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not playing videos game at home.

Fixed costs are expenses that remain constant for a period of time irrespective of the level of outputs. Variable costs are expenses that change directly and proportionally to the changes in business activity level or volume. Even if the output is nil, fixed costs are incurred.

The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

Market Supply : The horizontal summation of all the individual firm supply curves. A market supply curve shows what quantity will be supplied by all firms at various prices. or service. The impact of a surplus in a market is to drive prices down and to increase the quantity traded.

Marginal revenue is the increase in revenue that results from the sale of one additional unit of output. Marginal revenue helps a company identify the revenue generated from one additional unit of production. A company that is looking to maximize its profits will produce up to the point where marginal cost equals marginal revenue.

TFC curve is a horizontal straight line parallel to X-axis showing that total fixed costs remain same at all levels of output. 

The opportunity cost incurred per unit of good produced. This is calculated by dividing the cost of production by the quantity of output produced.
Average cost is a general notion of the per unit cost incurred in the production of a good or service. It is specified as the total cost divided by the quantity of output.

Relationship between TFC, TVC, and TC. Total fixed cost (TFC) is represented by a straight line parallel to X-axis and it remains unchanged for all output levels in a time period. ... TC is the sum of TFC and TVC. When no variable output is added, TC is equal to TFC.