Cost of Production

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1. Introduction

2. Types of costs
3.1 Opportunity, implicit and explicit costs
3.2 Fixed and variable costs
3.3 Average costs

3. Types of cost curves
4.4 Marginal cost curve
4.5 Average cost curves

4. Costs in Short run and in the Long run
5.6 Short run
5.7 Long run
5.8 Economies of scale

5. Cost analysis in the real world
6.9 Economies of scope
6.10 Experiential learning & technological advances 6.11 Many dimensions
6.12 Unmeasured costs
6. Conclusion


Table 1 – Various measures of cost

Figure 1 – Fixed cost
Figure 2 – Variable cost
Figure 3 – Types of cost curves
Figure 4 – Short run & long run average total cost curves Figure 5 – Minimum efficient scale of production


This study examines the different types of costs such as opportunity, implicit, explicit, fixed, variable and average costs that a firm would incur in order to carry out the production process. It talks about different types of cost curves to understand various measures of cost and establish a relationship between the changing patterns of different cost curves. It also tells how costs vary significantly in the long run and in the short run and how it effects the firms’ production and pricing decisions. Apart from the standard model, it also tells about the real world scenario in which the situations are even more complex than that of a text book. IT emphasizes the ground for economies of scale and economies of scope. It gives an overall picture of knick – knacks one has to possess in order to enter the market scene.

The cost incurred to make goods and services is called the Cost of Production. What would one do after making goods and services? The main motive of supplier of any firm is to sell his or her goods and services in the market and make profits. So, it would be no wonder if we say that a firms’ behavior is related to the Law of Supply which states that a firm wants to produce/sell more of a good when the price of that good is higher, thus resulting in an upward sloping supply curve. The Law of Supply holds well no matter at what point of time we are in history because firms after all enter the market aiming at profits and it is obvious that one incurs profits when a good is sold at a higher price. Whether a good is sold at a higher or a lower price depends upon its demand in the market for which we could say that Supply and Demand are always inevitably related. All this appears to look like a cycle wherein a firm produces goods and services, sells it in the market, make profits and invest a part of that profit once again to produce goods and services which results in a flawless Market Cycle where the whole process goes on as if it is operated by some sought of a hand, may be Adam Smith’s Invisible Hand, because that is the only hand we have in economics. By this, we understand that market also plays an important role in shaping a firms’ behavior. Therefore, in order to run a successful business, a firm should be skilled at Industrial Organization which is the study of how firms’ decisions are based on market conditions. Apart from all this, we could say that the whole process becomes even more complex when we identify with number of firms in the market economy where this number influences the prices in the market and the efficiency of market outcomes as well.


To be reminiscent of our primary focus, the cost of production, this cost, by the way has a major influence on firms’ production and pricing decisions. As told earlier, a firms’ cost of production is the cost incurred to...
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