Final answer:
Product costs are the sum of all costs a firm pays for producing and selling its products, including both fixed and variable costs. Fixed costs are expenditures that remain constant regardless of production levels, while variable costs change with production volume. In the short run, variable costs are subject to diminishing marginal returns.
Step-by-step explanation:
When discussing product costs, we look at the expenses a company incurs for producing and selling its products. These costs are a combination of all the inputs required in the production process. In the short run, product costs are divided into fixed costs and variable costs.
Fixed costs are expenditures that do not change with the level of production, such as rent, salaries, and equipment. These are often considered sunk costs since they have already been incurred and cannot be recovered. Conversely, variable costs change with the level of production. These can include materials and labor directly involved in creating the product.
It's also important to understand that variable costs usually demonstrate diminishing marginal returns, meaning as production increases, the additional cost of producing one more unit (marginal cost) will eventually rise. This concept is crucial for firms to understand when making decisions about production and pricing.