Cost of Production

Cost of Production
- refers to the total payment by a firm to the

owners of the factors of production

Factors of Production Factors of Payment

Land Rent
Labor Wages and Salaries
Capital Interest
Entrepreneurship Profit
Accounting Costs vs. Economic Costs
Accounting Costs Economic Costs
Retrospective Forward Looking
- recognizes costs only when - cost to a firm of utilizing
these are made and economic resources in
properly recorded production, including
- actual expenses plus opportunity cost.
depreciation charges for
capital equipment
Types of Cost
 Economic Cost = Explicit Cost + Implicit Cost
 Explicit
cost represents the business accounting cost,
which consists of:
◼ Fixedcosts
◼ Variable costs
 Implicit cost represents indirect costs:
◼ Entrepreneurship skills
◼ Time spent running the business
◼ Ideas
Explicit Costs
 Fixed Cost (FC)
 Costthat does not vary with the level of output
 Can be eliminated only by shutting down

 Variable Cost (VC)

 Cost that varies as output varies
Total Cost
- Total economic cost of production, consisting of
fixed and variable costs

Total Cost = Total Fixed Cost + Total Variable Cost

where:
TFC = total cost of fixed assets used in a given
period
TVC = total cost of the variable assets that a firm
uses in a given period of time
The Profit Concept (Revenue vs. Profit)

 Revenue
- sales generated by an enterprise

- value derived by the firm from selling goods and

services
Total Revenue (TR) = Selling Price (P) x Quantity (Q)

 Profit
- difference between the total revenue and total cost

Total Profit (TP) = Total Revenue (TR) – Total Cost (TC)

The Profit Concept (Revenue vs. Profit)

 If TR > TC, TP = positive value → Gain

 If TR < TC, TP = negative value → Loss

 If TR = TC → Break Even Point

 Break Even Point (BEP)

 Pointwhere total revenue is equal to total cost
 TR = TC

 P(Q) = TFC + TVC

 P(Q) = TFC + VC(Q)

Graphical Representation