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Production and Costs.docx

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ECON 1010
Sarrah Vakili

Production and Costs Costs of productionCosts are defined as those expenses faced by a business when producing a good or service for a market Every business faces costs and these must be recouped from selling goods and services at different prices if a business is to make a profit from its activities In the short run a firm will have fixed and variable costs of production Total cost is made up of fixed costs and variable costs Fixed Costs These costs relate do not vary directly with the level of output Examples of fixed costs include 1 Rent paid on buildings and business rates charged by local authorities 2 The depreciation in the value of capital equipment due to age 3 Insurance charges 4 The costs of staff salaries eg for people employed on permanent contracts 5 Interest charges on borrowed money 6 The costs of purchasing new capital equipment7 Marketing and advertising costs Variable Costs Variable costs vary directly with output Ie as production rises a firm will face higher total variable costs because it needs to purchase extra resources to achieve an expansion of supply Examples of variable costs for a business include the costs of raw materials labour costs and other consumables and components used directly in the production process We can illustrate the concept of fixed cost curves using the table below The greater the total volume of units produced the lower will be the fixed cost per unit as the fixed costs are spread over a higher number of units This is one reason why massproduction can bring down significantly the unit costs for consumersbecause the fixed costs are being reduced continuously as output expands
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