The goal of this module was to explore the relationship between the inputs used in production, the resulting output and the cost of that output. You learned how to:
- Define the term “production” and explain what a production function is
- Define and differentiate between marginal, average, and total product; compute and graph marginal, average, and total product
- Differentiate between explicit and implicit costs, accounting and economic profit
- Define and differentiate between marginal, average, fixed, variable and total costs; compute and graph marginal, average, fixed, variable and total costs
- Differentiate between short-run and long-run costs
- Define and explain long-run costs
This module was detailed and complicated, but that’s because production and cost issues are too. There are a near infinite number of different types of businesses and many have a unique production process. The local bakery down the street and Wonder bread don’t operate the same way or at the same scale. Neither does a home baker. So each production process and costs of production are bound to be different.
What should you remember from this module?
- Any change in the production process will cause a change in production cost.
- Average and marginal costs are per unit; Fixed, variable and total costs are just dollars spent on all units of output produced.
- Long-run costs are usually less than short-run costs because you have more options.
- Scale matters for some industries, but not others. The cost of producing electricity per kilowatt-hour is much less than the cost of using a home generator. But the cost of running a taxi business with 100 cabs is not much different than running the same business with 25 cabs.
Let’s return to the question posed at the beginning of the module: How does an improvement in technology affect production and costs? The answer is simple. An improvement in technology usually reduces the cost of producing a given quantity of output. In other words, a firm can produce the same amount of output at lower cost or more output for the same total cost. This can be shown graphically by an upward shift in the production curves (showing more Q for the same L) and by a downward (or rightward) shift in the cost curves (showing less cost for the same Q). Make sense?