Chapter 9: Limited Decision-Making in Perfect Competition

Chapter 8 Production Costs: Where Less Is More

In This Chapter

▶ Understanding that everything has a cost ▶ Recognizing different types of costs ▶ Figuring out which costs to ignore ▶ Examining the relationship between costs and output ▶ Changing cost over time

Production requires costs, and obviously you want to keep those costs as low as possible. Lower costs mean more profit, and profit is ultimately your goal. Before examining the various types of costs, recognize every cost associated with production. Costs that are often ignored include the cost of the business owner’s time and the money the owner has invested in the business.

In addition, recognize that not all costs are the same. Some costs can be changed very quickly, while other costs can’t be changed for a long time. Some costs factor into business decision-making, while other costs are ignored. Thus, you need a clear understanding of costs before you’re able to maximize profit.

Because your ultimate goal is to produce the profit-maximizing quantity of output, in this chapter I focus on the relationship between production costs and the quantity of output produced. The relationship between the production costs and output assumes that you’re using the cost-minimizing combination of inputs to produce any particular level of output. (See Chapter 6 for an overview of inputs and cost minimization.) Furthermore, the relationship between costs and output includes the opportunity costs of all inputs used in the production process.