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Economics presentation

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  • 1. The Costs Of ProductionShaikha Salah AlMidfa 201017515AfraHumaid AlShamsi 20105205Fatima Obaid Al Suwaidi 201010455Fatma Ahmed AlFalasi 200911404
  • 2. CONTENTTotal Revenue, Total Cost, and ProfitOpportunity CostsEconomic Profit vs. Accounting Profit Production & Costs The Various Measures Of Costs Costs In The Short & Long Run
  • 3. Cost Of Production Cost: “An amount that has to be paid or given up in order to get something.” What controls the behavior of a producer?(http://www.businessdictionary.com/definition/cost.html#ixzz1vKqC0lpM)
  • 4. Industrial Organization The study of how firms decisions about prices and quantities depend on the market conditions they face.Examples on Market Conditions:• Number of Competitors• What and how much a customer demands
  • 5. Achieving profitProfit = Total Revenue – Total Cost Total Revenue: The Total Cost: The amount a firm market value of the receives for the sale inputs a firm uses in of its output production
  • 6. Opportunity Costs“The cost of something is what you give up to get it” Ten Principles Of Economics Explicit Costs: Input costs that require an outlay of money by the firm - Wages - Rent Payments - Utilities Implicit Costs: Input costs that do not require an outlay of money by the firm
  • 7. Economists Vs. AccountantsEconomists are interested in production&pricing decisions Implicit Costs Explicit CostsAccountants are interested in keeping track of money flows Implicit Costs Explicit Costs
  • 8. The Cost Of Capital Is An Opportunity CostThe Opportunity Cost of the financial capital that has been invested in thebusiness is an important implicit cost. Capital: $ 900,000 $ 18,000 > or < 18,000 ? (2%) Annual Opportunity Cost
  • 9. Economic & Accounting ProfitEconomic Profit: Total revenue minus total cost (including both explicit & implicit costs)Accounting Profit: Total revenue minus total explicit cost* Accounting Profit > Economic profitBecause Implicit costs are ignored. Explici t Explicit Implicit Accounting Profit Economic Profit
  • 10. Production functionQuantity of output(cookies per hour) 100 80 60 40 20 0 1 2 3 4 5 Number of workers hired
  • 11. Total cost curve Marginal productTotalcost 60 50 40 30 20 10 Quantity of 0 20 40 60 80 100 120 output (cookies per hour)
  • 12. Production functionNumber Output Marginal Cost of Cost of Total cost of (quantity products of workers worker of inputsworkers of cookies labor s cost of produced factory + per hour) cost of workers) 0 0 $30 $0 $30 50 1 50 30 10 40 40 2 90 30 20 50 30 3 120 30 30 60 4 140 20 30 40 70 5 150 10 30 50 80 Diminishing marginal product
  • 13. From the production function To The Total-Cost Curve
  • 14. Fixed and variable costs Fixed costs (FC): costs that do not vary with the quantity of output produced. Variable costs (VC): costs that vary with the quantity of output produced. Total cost (TC) = FC + VC
  • 15. Example of the various measures of cost: Conrad’s coffee shopQuantity Total Fixed cost Variable Average Average Average Marginalof coffee cost cost fixed variable totalcost cost(cups per cost costhour) 0 $ 3.00 $ 3.00 $ 0.00 _ _ _ 1 3.30 $ 3.00 0.30 $ 3.00 $ 0.30 $ 3.30 $ 0.30 2 3.80 $ 3.00 0.80 1.50 0.40 1.90 0.50 3 4.50 $ 3.00 1.50 1.00 0.50 1.50 0.70 4 5.40 $ 3.00 2.40 0.75 0.60 1.35 0.90 5 6.50 $ 3.00 3.50 0.60 0.70 1.30 1.10 6 7.80 $ 3.00 4.80 0.50 0.80 1.30 1.30 7 9.30 $ 3.00 6.30 0.43 0.90 1.33 1.50 8 11.00 $ 3.00 8.00 0.38 1.00 1.38 1.70 9 12.90 $ 3.00 9.90 0.33 1.10 1.43 1.90 10 15.00 $ 3.00 12.00 0.30 1.20 1.50 2.10
  • 16. Conrad’s total-cost curve
  • 17. Average and marginal cost Average total cost = total cost/quantity ATC = TC/Q Marginal cost : the increase in total cost that arises from an extra unite of production.Marginal cost = change in total cost/change in quantity MC = ∆TC/ ∆Q
  • 18. Cost curves and their shapes: average total cost (ATC): total cost divided by the quantity of output. Average fixed cost (AFC): fixed cost divided by the quantity of output. Average variable cost (AVC): variable cost divided by the quantity of output. Marginal cost (MC): the increase in total cost that arises from an extra unite of production.
  • 19. Conrad’s average-cost and marginal-cost curves
  • 20.  The cost curves shown here for Conrad’s coffee shop have some features that are common to the cost curves of many firms in the economy.1. Rising marginal cost2. U-shaped average total cost3. The relationship between marginal cost and average total cost.
  • 21. Typical cost curves
  • 22.  The division of total costsbetween fixed and variablecosts depends on thetime horizon.
  • 23. Short Run Example: Ford Motor Company Size of the factory is fixed in the short run To vary quantity of cars produced, ford will have to change the number of workers they employ. Increase in quantity of cars produced, increases the cost.
  • 24. Diminishing Marginal Returns:“A law of economics stating that, as the number of newemployees increases, the marginal product of an additionalemployee will at some point be less than the marginalproduct of the previous employee.” Problem of overcrowding
  • 25. Long Run Example: Ford Motor Company Inputs are variable in the long run Firms can expand the size of factories, build new factories or close old ones. Ford can expand both the size of the factory and the workforce
  • 26. LRATC CurveFirm can choose from 3 factory sizes: S, M, L.The firm can change it’s factory size in the long run not in the short run.
  • 27. LRATC Curve To manufacture less than QA, in the long run the firm will choose size S. To manufacture between QA and QB, in the long run the firm will choose size M. To manufacture more than QB, in the long run the firm will choose size L.
  • 28. Scale of Production Economies of scale: Long run average total cost falls as the quantity of output increases. Constant returns to scale: Long run average total cost stays the same as the quantity of output changes Diseconomies of scale: Long run average total cost rises as the quantity of output increases
  • 29. Scale of Production Economies of Scale: Allows specialization among workers. It allows each worker to become better at a specific task Example: Assembly Line Diseconomies of scale: Coordination problem The more stretched the management become. It becomes less effective. QUIZ
  • 30. Quick Quiz1) Profit = Total Revenue + Total Cost False1) Accountants include Explicit & Implicit Costs False1) Fixed costs do not vary but variable costs do True
  • 31. Thanks For Listening