2. Cost Structures and Supply 1. Inputs All inputs to production may be classified into the Factors of Production: Land Labour Capital Enterprise When examining allocative efficiency (best use of resources to satisfy consumer wants) ALL costs must be identified Explicit Costs: the costs of production paid to people outside of the business Implicit Costs: (imputed costs) the cost of resources owned by the business. These may include accounting costs (eg: depreciation) or opportunity costs (owner’s labour)

3. 2. Economic and Accounting Costs Accounting Costs are the monetary costs of production Accounting CostsEconomic Costs Scooter Parts $200 $150 Total Accounting Costs$350 Sold for$550 Accounting Profit$200 Explicit Costs Scooter Parts $200 $150 Implicit Costs Wages ( 20 hours @ $9/hour ) Profit $180 $90 Total Economic Costs$620 Sold for$550 Economic Profit($70) Cost Structures and Supply Economic Costs are ALL costs to the business, both accounting costs and opportunity costs. This opportunity cost will also include the opp cost of the owner, defined as the minimum profit required to keep the business open in the long term. eg: Small Firm Refurbishing Scooters

4. 3. Economic Profit This is defined as the difference between a firm’s revenue and its economic costs Normal Profit: revenue = costs, a firm is earning sufficient profit to stay open in the long term Cost Structures and Supply Subnormal Profit: revenue < costs, a firm is earning less profit than expected and will close if this situation continues Supernormal Profit: revenue > costs, a firm is earning greater than expected profits

5. 4a. Shape of the Cost Curves – Marginal Cost Marginal Cost: the extra cost of producing an additional unit of output MC Output Costs Cost Structures and Supply where MC starts to rise, diminishing returns are setting in. MC initially falls, then rises (resembling a tick) the downward slope represents increasing returns to scale : inputs are used more efficiently as ouput is increased ( see short- run economies ) Increasing returns Diminishing Returns The Law of Diminishing Returns: As additional inputs are added to a fixed amount of another input, the additional output will eventually fall. eg: employ more workers while not increasing plant or machinery. Although output will increase, these increases will eventually get smaller with each additional worker. In the short term, there are always some factors that are fixed in supply In the long term, all inputs are variable.

6. Inputs Total Output Marginal Product ( additions to output ) One worker 100 Two workers Three workers Four workers Five workers Six workers 250 100 150 400 150 525 125 625 100 700 75 increasing returns constant returns diminishing returns eg: Large Firm Refurbishing Scooters

7. 4b. Shape of the Cost Curves – Average Costs Average Variable Cost: production costs per unit MC AC AVC Output Costs Cost Structures and Supply Average Cost is also U-shaped and derived from MC with non- production costs (fixed costs) also included the gap between AC and AVC represents average fixed costs so will get smaller as output is increased. AVC has a U-shape, and is derived from the MC curve while MC is below AVC, it will fall when MC is above AVC, it will rise so the MC curve cuts the AVC curve at its lowest point ( this is also the most efficient point of production ) Short-run economies and short-run diseconomies pg77 Make a VERY BRIEF note on each of these