This document contains lecture notes on microeconomics and finance. It discusses production and costs, including fixed and variable costs. It also discusses financial instruments like bonds and stocks, using the example of Pooley Pizza Company borrowing money through bonds or selling ownership shares in the form of stocks. The document provides examples of calculating total, average, and marginal costs, and uses the numbers from a pizza production example to calculate profit.

2. Microeconomics
Lecture 11
Finance
Production and Costs

3. Questions?

4. Video Project
5% of Grade
2-5 Minutes
Introduction
Concept
Definition
Equation
Chart
Example

5. Foundation Finance
Formula
(1 + r )
n
r = risk rate
n = time periods

6. Finance
Factor = (1+r)n
Future Value = Amount x Factor
Present Value = Amount ÷ Factor

7. Financial Markets
Where financial securities
are bought and sold.
Stocks and Bonds
Equity and Debt

8. I. O. U
I OweYou
Promises
Name
Amount
Date
Signature

9. Promissory Note
Trading paper for paper
I.O. U.
One Dollar
Due Date
Dr. Gale

10. Financial System
Institutions that match
people who save
money with people
who need money

11. Financial Instruments
I.O.Us
Simple to Complex
Relationship
Contract

12. Financial System
Two categories
Financial Markets
Financial Intermediaries

13. Financial Markets
Bond Market
Stock Market

14. Financial Markets
Bonds - Borrow - Debt
Stocks - Sell Ownerships
Equity

15. Bond Markets
What is a Bond?
Certificate of
Indebtedness

17. Bond
Term - Length of time
Credit Risk - chance of default
Tax - How is the interest or
profit taxed

19. Stock
Ownership Share
Company sells once
Then resold to other buyers
Limited Liability
No promises of profit
Equity position

20. Pooley Pizza Company

21. Pooley Pizza Company
Borrow
or
Sell ownership shares

22. Pooley Pizza Company
Bond
100
Dollars
Dr. Gale
CEO
10% 2023
Pays 10 Dollars each year
Pays 100 Dollars at maturity
2014
Coupon
2015
Coupon
2016
Coupon
2017
Coupon
2018
Coupon
2019
Coupon
2020
Coupon
2021
Coupon
2022
Coupon
2023
Coupon

23. Pooley Pizza Company
Need to raise 1,000 Dollars
Create 1,000 shares and sell
for 1 Dollar each
Each share is worth 1/1,000
of the company

24. Pooley Pizza Company
Stock Certificate
One
Share
Dr. Gale
CEO
Current Share Owner: Bill Gates

25. Microeconomics
Lecture 11
Production and Costs

26. Technology
Turning inputs
into outputs

27. Short Run
At least one input is fixed
Long Run
All inputs are variable

28. Fixed Costs
Variable Costs

29. Total Costs = Fixed Costs +Variable Costs
TC = FC +VC

30. Pizza Consultant

31. Production Costs
$2.00 Labor cost per pizza
$0.75 Ingredient cost per pizza
$0.25 Electricity cost per pizza
$2,800 Rent cost per month
$200 Insurance cost per month
Variable Costs
$2.00 Labor cost per pizza
$0.75 Ingredient cost per pizza
$0.25 Electricity cost per pizza
$3.00 Total variable costs per pizza
Fixed Costs
$2,800 Rent cost per month
$200 Insurance cost per month
$3,000 Total fixed costs

32. Total Costs
= $3,000 + $3.00 x quantity of pizzas
Assume 1,000 pizzas
= $3,000 + $3.00 x 1,000
= $3,000 + $3,000
= $6,000
TC = Fixed Costs +Variable Costs
TC

33. Average Total Costs
ATC = Total Costs ÷ quantity of pizzas
= $6,000 ÷ 1,000
= $6.00 each
ATC

34. Average Total Costs = ATC = TC ÷ Q
Total Costs = TC = FC +VC
Profit = TR - TC
Total Revenue = TR = Price • Q
Total Costs = TC = ATC • Q

35. Analysis
FC = $3,000
VC = $3
Q = 1,000
Price = $7
Profit = ?
Profit =TR - TC
=$7Q - $3,000 - $3Q
=$7,000 - $3,000 - $3,000
=$1,000