ABSTRACT
The theory of supply and production is one of the principal theories of economics and is the foundation upon which many other economic theories are based. This chapter validates a modern approach to the principles and practice of airline supply, production and cost analysis. It provides a body of knowledge that will allow readers to understand how the costs of production are minimized through either the mix of inputs or the reallocation of resources across multiple plants. The chapter illustrates which costs are relevant for specific airline decisions. The economic definition of a cost is the foregone alternative use incurred in the exchange, transformation, use, and production of goods or resources. Marginal costs are simply calculated by the change in total costs divided by the change in output. The final major method of classifying costs is either accounting or economic costs. Accounting costs generally recognize only explicit costs, while economic costs include both explicit and implicit costs.
