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101 lecture 13

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101 lecture 13

1. 1. Microeconomics Lecture 13 ! The Costs of Production
2. 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. 3. Riyadh Pizza Company
4. 4. Total Cost TC
5. 5. Total Cost TC The market value of all of the inputs a ﬁrm uses in production
6. 6. Total Revenue TR
7. 7. Total Revenue TR Price x Quantity ! TR = P x Q
8. 8. Proﬁt PR
9. 9. Proﬁt PR Total Revenue minus Total Cost ! PR = TR - TC
10. 10. Production Function
11. 11. Production Function The relationship between inputs and outputs
12. 12. Marginal Product
13. 13. Marginal Product Additional output of a unit of input
14. 14. Diminishing Marginal Product
15. 15. Diminishing Marginal Product Marginal product declines as input increases
16. 16. Fixed Costs FC
17. 17. Fixed Costs FC Costs that do not vary with output
18. 18. Variable Costs VC
19. 19. Variable Costs VC Costs that do vary with output
20. 20. Total Costs TC
21. 21. Total Costs TC Fixed costs plus variable costs ! TC = FC + VC
22. 22. Average Total Costs ATC
23. 23. Average Total Costs ATC Total costs divided by quantity of output ATC = TC ÷ Q
24. 24. Average Fixed Costs AFC
25. 25. Average Fixed Costs AFC Fixed costs divided by quantity of output AFC = FC ÷ Q
26. 26. Average Variable Costs AVC
27. 27. Average Variable Costs AVC Variable costs divided by quantity of output AVC = VC ÷ Q
28. 28. Marginal Cost MC
29. 29. Marginal Cost MC The increase in total cost for the next unit MC = ∆TC ÷ ∆Q
30. 30. Q 0 1 2 3 4 5 6 7 8 9 10
31. 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. 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. 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. 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. 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. 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. 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. 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. 39. Explicit Costs
40. 40. Explicit Costs Costs that require money
41. 41. Implicit Costs
42. 42. Implicit Costs Costs that do not require money
43. 43. Accounting Proﬁt
44. 44. Accounting Proﬁt Total Revenue minus explicit costs
45. 45. Economic Proﬁt
46. 46. Economic Proﬁt Total Revenue minus both explicit costs and implicit costs
47. 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. 48. Efﬁcient Scale
49. 49. Efﬁcient Scale The quantity of output that minimizes average total cost
50. 50. Short Run vs. Long Run
51. 51. Short-Run
52. 52. Short-Run Cannot change a ﬁxed cost
53. 53. Long-Run
54. 54. Long-Run Can change all costs ! All costs become variable
55. 55. Economies of Scale
56. 56. Economies of Scale Long-run average costs fall as quantity of output increases
57. 57. Diseconomies of Scale
58. 58. Diseconomies of Scale Long-run average costs rise as quantity of output increases
59. 59. Constant Returns to Scale
60. 60. Constant Returns to Scale Long-run average costs stays the same as quantity of output increases