Explain how to determine a firm's cost of production and economic profit

Explain how to determine a firm's cost of production and economic profit

The cost of production of a firm is determined by estimating the cost of all the inputs used in the production process. The production cost includes the cost of labor, cost of raw material, and cost of the fixed assets used in producing the goods or delivering the services.

The economic profit is determined by subtracting the cost of the firm and the opportunity cost from the revenue earned by the firm.

Correlate the firm's output and the quantity of labor in the short run

The quantity of labor is one of the most important factors to determine the output level of the firm. More labor used in the production process increases the level of output to some extent. After a certain point in time, if more labor is employed, it decreases the level of output produced. This happens because of diminishing marginal product that labor exhibits.

Explain the influence of costs in the short run on a firm's output

In the short run, only the variable costs affect the level of production of the firm. The fixed cost has no influence on the level of output in the short run. Any increase in the variable cost leads to a decrease in the level of output produced in the short run.

Calculate a long-run average cost curve

The following diagram indicated the long-run average cost curve of the firm. The long-run average cost curve is formed by enveloping the short-run average costs of the firm.

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