Cost of Production

"Sears expects, however, that the cost structure should improve as it opens more Sears Grand stores and is able to enjoy economies of scale.."
"Using economies of scale, IBM and other Web hosting companies host and manage Web sites for clients less expensively than what it would cost most companies to run their own sites."

Abstract                                                        Readings

The analysis of firms' choices requires you to learn some fundamentals - and we begin here with the production process and discuss how inputs are transformed into outputs - how URI's faculty expertise is transformed into an education, how Nissan's plant in Smyrna, TN and the Subway located in the Emporium transform labor, machines, and raw materials into automobiles and sandwiches. The basics of production theory also allow us to understand the cost concepts central to business choices and part of the jargon used in the business world. This will help you in the rest of the semester and it should help you better understand statements such as the following that you are likely to run into. "Sears expects, however, that the cost structure should improve as it opens more Sears Grand stores and is able to enjoy economies of scale... " and "[u]sing economies of scale, IBM and other Web hosting companies host and manage Web sites for clients less expensively than what it would cost most companies to run their own sites."

Goals

1. Define the important production concepts including total, average, and marginal product and be able to compute them when given production data.

2. Explain the concept diminishing marginal product.

3. Explain the relationship between diminishing marginal product and increasing marginal cost.

4. Define economies of scale and economies of scope, describe their significance and that factors that contribute to them, and be able to identify them when given production information.

Practice Examples:  Shoplifting Tutoring