Cost of production refers to the total cost incurred by a
business to produce a specific quantity of a product or offer a service. Production costs may include things such as labor, raw materials, or consumable supplies. In economics, the cost of production is defined as the expenditures incurred to obtain the factors of production such as labor, land, and capital, that are needed in the production process of a product. Short-run and Long-run Cost
Short-run: The short-run is a certain future period of production where the firm’s one input of production is fixed while others are variable. The short-run does not specify the extent of time but rather is unique to the firm, industry, or economic variable. During the short-run period, the firm faces both fixed and variable costs. It differs in the long run. Long-run: During the long-run period, all the factors of production and costs involved in the production are variable. During this period, a firm can adjust its costs. During the long run, a firm becomes in the position to research more technologies for production which can further help in the production of the desired level of output at a lowered cost. The firm can minimize the cost of every unit as the firm gets time to recover the losses, if any, and search for more efficient ways of production. Average and Marginal Cost
Marginal cost is the change in total cost when another
unit is produced; Average cost is the total cost divided by the number of goods produced. Relationship Between Average and Marginal Cost
This graph is a cost curve that shows the
average total cost, marginal cost, and marginal revenue. The curves show how each cost changes with an increase in product price and quantity produced. When the average cost declines, the marginal cost is less than the average cost. When the average cost increases, the marginal cost is greater than the average cost. When the average cost stays the same (is at a minimum or maximum), the marginal cost equals the average cost. Total Cost, Fixed Cost and Variable Cost
Fixed Cost: Fixed costs do not account for the number of goods or services a company produces. A fixed cost is an expense that a company is obligated to pay, and it is usually time-related. Variable Cost: Variable costs and total costs depend on the number of goods or services a company produces. Variable costs are functions of a company's production volume. Relationship among Total Cost, Fixed Cost and Variable Cost
