Two things determine profits: income, or turnover (the price at which we sell something) and costs (how much we spent making what we sell). Therefore, knowing how much our costs are going to be is essential when planning the viability of a business, especially given that in a perfect economy, price is not determined by us but by what the market dictates. This is therefore essential before we can put all these factors into place and look at the whole picture: what to produce, how much of it to produce, and whether we will make anything out of it.
In this first LP on costs, we will start by remembering what we learned a few weeks back:
- Production maximisation, then
- cost minimisation and put them together in
- production duality analysis.
Then, we’ll look at the framework in which we analyse costs: the types, what determines them and how this determines our choices regarding production levels, starting with:
- Period analysis, learning about what determines the short and long run; then move onto the basic
- types of cost, which will affect
- average and marginal costs and their importance, before putting it together in
- cost analysis in the short run.
