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101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
101 lecture 13
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101 lecture 13

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  • 1. Microeconomics Lecture 13 ! The Costs of Production
  • 2. Key Terms total cost profit explicit costs implicit costs economic profit accounting profit production function marginal product diminishing marginal product fixed costs variable costs average total costs average fixed costs average variable costs marginal costs efficient scale economies of scale diseconomies of scale constant returns to scale
  • 3. Riyadh Pizza Company
  • 4. Total Cost TC
  • 5. Total Cost TC The market value of all of the inputs a firm uses in production
  • 6. Total Revenue TR
  • 7. Total Revenue TR Price x Quantity ! TR = P x Q
  • 8. Profit PR
  • 9. Profit PR Total Revenue minus Total Cost ! PR = TR - TC
  • 10. Production Function
  • 11. Production Function The relationship between inputs and outputs
  • 12. Marginal Product
  • 13. Marginal Product Additional output of a unit of input
  • 14. Diminishing Marginal Product
  • 15. Diminishing Marginal Product Marginal product declines as input increases
  • 16. Fixed Costs FC
  • 17. Fixed Costs FC Costs that do not vary with output
  • 18. Variable Costs VC
  • 19. Variable Costs VC Costs that do vary with output
  • 20. Total Costs TC
  • 21. Total Costs TC Fixed costs plus variable costs ! TC = FC + VC
  • 22. Average Total Costs ATC
  • 23. Average Total Costs ATC Total costs divided by quantity of output ATC = TC ÷ Q
  • 24. Average Fixed Costs AFC
  • 25. Average Fixed Costs AFC Fixed costs divided by quantity of output AFC = FC ÷ Q
  • 26. Average Variable Costs AVC
  • 27. Average Variable Costs AVC Variable costs divided by quantity of output AVC = VC ÷ Q
  • 28. Marginal Cost MC
  • 29. Marginal Cost MC The increase in total cost for the next unit MC = ∆TC ÷ ∆Q
  • 30. Q 0 1 2 3 4 5 6 7 8 9 10
  • 31. Fixed Cost Q FC 0 100 1 100 2 100 3 100 4 100 5 100 6 100 7 100 8 100 9 100 10 100
  • 32. Fixed Variable Cost Cost Q FC VC 0 100 1 100 20 2 100 39 3 100 59 4 100 84 5 100 120 6 100 160 7 100 212 8 100 270 9 100 340 10 100 420
  • 33. Total Fixed Variable Cost Cost Cost TC Q FC VC FC + VC 0 100 100 1 100 20 120 2 100 39 139 3 100 59 159 4 100 84 184 5 100 120 220 6 100 160 260 7 100 212 312 8 100 270 370 9 100 340 440 10 100 420 520
  • 34. Total Fixed Variable Cost Cost Cost TC Q FC VC FC + VC 0 100 100 Average Fixed Cost AFC FC ÷ Q 1 100 20 120 100 2 100 39 139 50 3 100 59 159 33 4 100 84 184 25 5 100 120 220 20 6 100 160 260 17 7 100 212 312 14 8 100 270 370 13 9 100 340 440 11 10 100 420 520 10
  • 35. Total Fixed Variable Cost Cost Cost TC Q FC VC FC + VC 0 100 100 Average Average Fixed Variable Cost Cost AFC AVC FC ÷ Q VC ÷ Q 1 100 20 120 100 20.0 2 100 39 139 50 19.5 3 100 59 159 33 19.7 4 100 84 184 25 21.0 5 100 120 220 20 24.0 6 100 160 260 17 26.7 7 100 212 312 14 30.3 8 100 270 370 13 33.8 9 100 340 440 11 37.8 10 100 420 520 10 42.0
  • 36. Total Fixed Variable Cost Cost Cost TC Q FC VC FC + VC 0 100 100 Average Average Average Fixed Variable Total Cost Cost Cost AFC AVC ATC FC ÷ Q VC ÷ Q TC ÷ Q 1 100 20 120 100 20.0 120.0 2 100 39 139 50 19.5 69.5 3 100 59 159 33 19.7 53.0 4 100 84 184 25 21.0 46.0 5 100 120 220 20 24.0 44.0 6 100 160 260 17 26.7 43.3 7 100 212 312 14 30.3 44.6 8 100 270 370 13 33.8 46.3 9 100 340 440 11 37.8 48.9 10 100 420 520 10 42.0 52.0
  • 37. Total Fixed Variable Cost Cost Cost TC Q FC VC FC + VC 0 100 100 Average Average Average Marginal Fixed Variable Total Cost Cost Cost Cost MC AFC AVC ATC FC ÷ Q VC ÷ Q TC ÷ Q ∆TC ÷ ∆Q 1 100 20 120 100 20.0 120.0 20 2 100 39 139 50 19.5 69.5 19 3 100 59 159 33 19.7 53.0 20 4 100 84 184 25 21.0 46.0 25 5 100 120 220 20 24.0 44.0 36 6 100 160 260 17 26.7 43.3 40 7 100 212 312 14 30.3 44.6 52 8 100 270 370 13 33.8 46.3 58 9 100 340 440 11 37.8 48.9 70 10 100 420 520 10 42.0 52.0 80
  • 38. Total Cost Curve 600 570 540 510 480 450 420 390 360 330 300 270 240 210 180 150 120 90 60 30 0 0 1 2 3 4 5 6 7 8 9 10
  • 39. Explicit Costs
  • 40. Explicit Costs Costs that require money
  • 41. Implicit Costs
  • 42. Implicit Costs Costs that do not require money
  • 43. Accounting Profit
  • 44. Accounting Profit Total Revenue minus explicit costs
  • 45. Economic Profit
  • 46. Economic Profit Total Revenue minus both explicit costs and implicit costs
  • 47. Accounting Profit = Total Revenue - Explicit Costs 100 - 30 = 70 Economic Profit = Total Revenue - Explicit Costs - Implicit Cost 100 - 30 - 40 = 30 100 75 50 25 0 Accounting Profit Economic Profit
  • 48. Efficient Scale
  • 49. Efficient Scale The quantity of output that minimizes average total cost
  • 50. Short Run vs. Long Run
  • 51. Short-Run
  • 52. Short-Run Cannot change a fixed cost
  • 53. Long-Run
  • 54. Long-Run Can change all costs ! All costs become variable
  • 55. Economies of Scale
  • 56. Economies of Scale Long-run average costs fall as quantity of output increases
  • 57. Diseconomies of Scale
  • 58. Diseconomies of Scale Long-run average costs rise as quantity of output increases
  • 59. Constant Returns to Scale
  • 60. Constant Returns to Scale Long-run average costs stays the same as quantity of output increases

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