- The document discusses the concepts of accounting costs, economic costs, fixed costs, variable costs, and marginal costs from a firm's perspective. - It provides an example of a factory owner, Alexander, who produces fishing lures, to illustrate how to calculate accounting profit versus economic profit based on the costs of production. - Key costs discussed include explicit costs like wages versus implicit opportunity costs, how costs shape the short-run average and marginal cost curves, and the principle of diminishing returns.

1. Cost of Production Mankiw 13

15. Example Are these numbers for output consistent with diminishing returns? Yes output increases at decreasing rate Would the firm ever hire 8 workers? No output decreases 128 8 5 147 7 5 144 6 5 125 5 5 96 4 5 63 3 5 32 2 5 9 1 5 0 0 5 Q L K

16. Graph

17. Marginal and Average Product Average Product=Q/L If L=1, AP=9/1=9 If L=2, AP=32/2=16 Marginal Product= ∆Q/∆L If L=1,MP=9-0/1-0=9 If L=2, MP=32-9/2-1=23 Where is diminishing returns? With 5 th worker, when MP falls 9 9 9 1 -19 16 128 8 3 21 147 7 19 24 144 6 29 25 125 5 33 24 96 4 31 21 63 3 23 16 32 2 - - 0 0 MP AP Q L

18. Graph of Marginal and Average Product Diminishing returns

20. Marginal Product is slope of Total Product Curve 9 23

28. Total Product 147 7 5 144 6 5 125 5 5 96 4 5 63 3 5 32 2 5 9 1 5 0 0 5 Q L K

29. Costs FC=Pk*K FC=50*5 VC=Pl*L VC=100*l 147 700 250 144 600 250 125 500 250 96 400 250 63 300 250 32 200 250 9 100 250 0 0 250 Q VC FC

31. VC=L*100 00 00 00 00 00 00 00 00 00

33. Short Run Costs FC VC Q $ 250

34. Short Run Costs FC VC Q $ 250 TC TC=FC=VC

35. Costs 33.33 6.46 4.76 1.70 950 700 250 147 5.26 5.90 4.17 1.74 850 600 250 144 3.45 6.00 4.00 2.00 750 500 250 125 3.03 6.77 4.17 2.60 650 400 250 96 3.23 8.73 4.76 3.97 550 300 250 63 4.35 14.06 6.25 7.81 450 200 250 32 11.11 38.89 11.11 27.78 350 100 250 9 250 0 250 0 MC ATC AVC AFC TC V C F C Q MC= ∆TC/∆Q AFC=FC/Q AVC=VC/Q ATC=TC/Q TC=FC+VC VC=PL*L FC=Pk*K

38. Short Run Costs VC Q $ 50 VC increases slowly at first. Since VC is ↑ more slowly than q, AVC ↓. LaterVC increases faster than q and AVC ↑ .

39. Average Cost Curves AFC AVC Q $

41. Average Cost Curves AFC AVC Q $ ATC AFC

46. Average Cost Curves AVC Q $ ATC MC

50. Average Total Cost in the Short and Long Runs