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Short run costs SFLS

1.) In the short run, some costs are fixed and cannot be changed, such as capital and technology. Explicit costs that can be varied include variable costs like wages. 2.) There are two views of total costs - the accounting view includes explicit costs plus depreciation, while the economic view includes all explicit and implicit opportunity costs. 3.) Implicit costs include forgone earnings, depreciation, and normal profit. Economic profit is calculated as total revenue minus total costs (explicit and implicit). Accounting profit only considers explicit costs and depreciation.

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Production and Costs Short run costs
Define: costs
Accountant vs. Economist
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs
Defining Total Costs Explicit Costs (accounting costs) -Cost paid is cash. ( just the money itself )
Defining Total Costs Explicit Costs (accounting costs) -Cost paid is cash. ( just the money itself ) Implicit Costs (opportunity costs) - The opportunity costs where real money is not exchanged. -Also the cost of factors of production that change where no real money is exchanged. ( example – Depreciation ) - Also includes a normal profit
Defining Total Costs Explicit Costs (accounting costs) -Cost paid is cash. ( just the money itself ) Implicit Costs (opportunity costs) - The opportunity costs where real money is not exchanged. -Also the cost of factors of production that change where no real money is exchanged. ( example – Depreciation ) - Also includes a normal profit Normal Profit – willNormal Profit – will be a significantbe a significant issue for later toissue for later to understandunderstand
Explicit vs. Implicit Costs: An Example You need 100,000 to start your business. The interest rate is 5%. Case 1: borrow 100,000 explicit cost = $5000 interest on loan Case 2: use $40,000 of your savings, borrow the other $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000.
Explicit vs. Implicit Costs: An Example You need 100,000 to start your business. The interest rate is 5%. Case 1: borrow 100,000 explicit cost = $5000 interest on loan Case 2: use $40,000 of your savings, borrow the other $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000. In both cases, total (explicit + implicit) costs are $5000.
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)Depreciation
Defining Total Costs Implicit Costs Depreciation - Things lose value over time, an old machine is not worth as much as a new one. - It is an implicit cost
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit
Defining Profit Accountant Profit - (TR) total revenue minus (explicit cost + depreciation)
Defining Profit Accountant Profit Economic Profit - A firm’s (TR) total revenue minus total costs ( Explicit + Implicit)
Defining Profit Accountant Profit Normal Profit -The opportunity cost of doing something else with the factors of production. -The returns of entrepreneurship -In graphs later this will equal zero (0), which will equal MR= MC Economic Profit
Defining Profit Accountant Profit Normal Profit -The opportunity cost of doing something else with the factors of production. -The returns of entrepreneurship -In graphs later this will equal zero (0), which will equal MR= MC Economic Profit Normal Profit – isNormal Profit – is considered a costconsidered a cost for an economist, itfor an economist, it is the opportunityis the opportunity cost of timecost of time
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit
Two Views of Total Costs (Explicit costs + all Implicit costs = Total Costs) The Accounting View: (Explicit Costs + depreciation = Total Costs) The Economic View: It is not just the money but also the opportunity costs. Add up all your costs and add up all your revenue but also include your opportunity costs or doing something else instead. It is only about the money, add up your costs and up your revenue and ask did you make money? Two views on what costs are:
The Accounting View of Total Costs: b.) Add up you explicit costs. - Explicit costs is the actual money. c.) Add up your depreciation. - Depreciation is the degradation of capital. a.) Add up all your profit. If it’s positive you made money If it’s negative you lost money d.) Add B and C together a minus it from A a – (b + c) = economic profit (accountant profit) - Your total revenue earned
Do the exact same thing as an accountant would do But don’t forget your opportunity cost of doing something else. b.) Add up you explicit costs c.) Add up all of your implicit costs a.) Add up all your profit - Depreciation + Normal Profit The Economists View of Total Costs: - All the actual money - Your total revenue If it’s positive you made money If it’s negative you lost money If it’s zero you made a normal profit d.) Add B and C together a minus it from A a – (b + c) = economic profit
Economists vs. Accountants
Economists vs. Accountants Total costs
Economists vs. Accountants Total costs Total costs
Economists vs. Accountants Total costs Total costs
The equilibrium rent on office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if a. you rent your office space b. you own your office space Economic profit vs. Accounting profit Example:
The rent on office space increases $500/month. a.You rent your office space. Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month. Answers 26 Example:
The rent on office space increases $500/month. b. You own your office space. Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month. Answers 27 Example:
The rent on office space increases $500/month. b. You own your office space. Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month. Answers 28 Example: What if the rent increased by 1 million? IfWhat if the rent increased by 1 million? If you keep your business there, then youyou keep your business there, then you lose the opportunity to earn that, youlose the opportunity to earn that, you could rent it out and move your businesscould rent it out and move your business to a cheaper officeto a cheaper office
In 2012, Toni taught music and earned 32,000RMB. She also earned 14,000RMB by renting out her basement. On January 1, 2013, she quit teaching, stopped renting out her basement, and began to use it as the office for her new Website business. She took 2,000RMB from her savings account to buy a computer. During 2013, she paid 1,500RMB for the lease of a Web server and 1,750RMB for high-speed internet service. She received a total revenue from website designing of 45,000RMB and earned interest at 5% a year on her savings account. At the end of 2013, Toni could have sold her computer for 500RMB. a. Calculate Toni’s explicit costs and implicit costs in 2013. b. Calculate Toni’s economic profit in 2013. Another Example:
a. Explicit costs are the $1,500 for the lease of a Web server and $1,750 for high speed Internet service. The total explicit costs are‐ $3,250. The implicit costs are the $32,000 in wages forgone, the $14,000 in rent forgone, the $100 in forgone interest payments on the savings, and the $1,500 in economic depreciation for the computer. The total implicit costs are $47,600. b. The economic profit equals total revenue minus total opportunity costs, which is $45,000 − ($3,250 + $47,600) = − $5,850. Toni incurred an economic loss of $5,850 for the year. Answers Example:
Short Run Long Run Types of Costs Through Time
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable
Factory An example of someAn example of some business costsbusiness costs Let’s say you are the ownerLet’s say you are the owner of a factoryof a factory
Factory I want a bigger factory today
Factory I want a bigger factory today
Factory I want a bigger factory today So you want to “grow”So you want to “grow” your factoryyour factory
Factory I want a bigger factory today
Factory In the short run some costs are fixed – they can’t be changed
Short Run - Input quantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital
Factory Workers Now for example, let’sNow for example, let’s look at the workers inlook at the workers in your factoryyour factory
Factory Workers I want more workers!
Factory Workers I want more workers! 加 加 加 加 加 加 加 加
Your Fired! Factory Workers
Your Fired! Factory Workers
Short Run - Input quantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital 2.) Variable costs L - labor - Input whose quantity the firm can vary at any time. Ex. Labor can change, you can fire or hire workers. You can add workers and removeYou can add workers and remove workers anytime, but you can’t justworkers anytime, but you can’t just make your factory bigger or smaller atmake your factory bigger or smaller at anytime.anytime.
Like a Boss! Factory Workers Fixed Costs Variable Costs
Short Run Long Run - Input quantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital 2.) Variable costs L - labor - Input whose quantity the firm can vary at any time. Ex. Labor can change, you can fire or hire workers. - All inputs can be varied. - What matters is the scale 1.) Everything is variable!
-To produce more output in the short run, a firm employs more labor, which means the firm must increase its costs. Short Run Costs (TC) Total Cost (MC) Marginal Cost (AC) Average Cost
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost (MC) Marginal Cost (AC) Average Cost
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
(TC) Total Cost - is the cost of all the factors of production the firm uses. (TFC) Total Fixed Cost - cost of land, capital, and entrepreneurship. -total fixed cost doesn’t change as output changes Short Run Costs
What is the (TFC) Total Fixed Cost?
What is the (TFC) Total Fixed Cost? = 10 The cost you will have no matter what the output is
Total fixed cost (TFC) is constant it graphs as a horizontal line.
(TC) Total Cost (TFC) Total Fixed Cost Short Run Costs (TVC) Total Variable Cost - cost of labor. - To change its output in the short run, a firm must change the quantity of labor it employs, so total variable cost changes as output changes.
1.) What is the (TVC) total variable costs at an output of 1? 2.) What is the (TVC) total variable costs at an output of 3? 3.) What is the (TVC) total variable costs at an output of 6?
1.) What is the (TVC) total variable costs at an output of 1? 2.) What is the (TVC) total variable costs at an output of 3? 3.) What is the (TVC) total variable costs at an output of 6? 6 12 18
Total cost (TC) also increases as output increases. Total variable cost (TVC) increases as output increases.
(TC) Total Cost (TFC) Total Fixed Cost (TVC) Total Variable Cost + =
(MC) Marginal Cost Short Run Costs - is the change in total cost that results from a one- unit increase in total product. - Marginal cost tells us how total cost changes as total product changes. (TC) Total Cost ______________TCTC QQ ______________- Total cost - Quantity of output
(AC) Average Cost - is (TC) per unit of output. (AFC) Average Fixed Cost is (TFC) per unit of output. Short Run Costs (TC) Total Cost (MC) Marginal Cost __________TFCTFC QQ __________________- Fixed cost - Quantity of output
Average fixed cost (AFC) decreases as output increases.
Short Run Costs (TC) Total Cost (AVC) Average Variable Cost is (TVC) per unit of output. - is (TC) per unit of output. (AFC) Average Fixed Cost is (TFC) per unit of output. (MC) Marginal Cost (AC) Average Cost
Short Run Costs (TC) Total Cost (AVC) Average Variable Cost is (TVC) per unit of output. - is (TC) per unit of output. (AFC) Average Fixed Cost is (TFC) per unit of output. (MC) Marginal Cost (AC) Average Cost __________TVCTVC QQ __________________- Total Fixed cost - Quantity of output
Average fixed cost (AFC) decreases as output increases. The average variable cost curve (AVC) is U- shaped.
(AC) Average Cost (AFC) Average Fixed Cost (AVC) Average Variable Cost + =
(MC) Marginal Cost MC = Q TC - is the change in total cost that results from a one-unit increase in total product. - Marginal cost tells us how total cost changes as total product changes.
The (MC) marginal cost curve is U- shaped and intersects the (AVC) average variable cost curve and the (ATC) average total cost curve at their minimum points.
Short Run Costs Why the (ATC) Average Total Cost Curve Is U-Shaped The U shape of the average total cost curve arises from the influence of two opposing forces: 1.) Spreading total fixed cost over a larger output 2.) Decreasing marginal returns (DMR)
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
Linking the Cost Curves and Product Curves
A firm’s marginal cost curve is linked to its marginal product curve. If marginal product rises, marginal cost falls. If marginal product is a maximum, marginal cost is a minimum.
A firm’s average variable cost curve is linked to its average product curve. If (AP) average product rises, (AVC) average variable cost falls. If (AP) average product is a maximum, (AVC) average variable cost is a minimum.
A firm’s average variable cost curve is linked to its average product curve. If (AP) average product rises, (AVC) average variable cost falls. If (AP) average product is a maximum, (AVC) average variable cost is a minimum. They are a mirror oppositeThey are a mirror opposite of each other. So theof each other. So the maximum and minimummaximum and minimum points are at the samepoints are at the same output points.output points.
Workers MCAPMP Then, at the point of maximum marginal product, marginal cost is a minimum. Highest MP Lowest MC As the firm hires more labor, marginal product decreases and marginal cost increases. Workers At low levels of employment and output, as the firm hires more labor, marginal product and average product rise, and marginal cost and average variable cost fall. Cost Curves and Product Curves AVC MP AP MC AVC
(MPL)=1 好 工 人 (MPL)=2 好 工 人 (MPL)=4 好 工 人 (MPL)=3 好 工 人 (MPL)=1 不 好 工 人 (MPL)=0 白痴 工人 (MPL)=-1 愚蠢白 痴工人 Decreasing Marginal Returns (DMR) Negative M - Returns Increasing Marginal Returns
(MPL)=1 好 工 人 (MPL)=2 好 工 人 (MPL)=4 好 工 人 (MPL)=3 好 工 人 (MPL)=1 不 好 工 人 (MPL)=0 白痴 工人 (MPL)=-1 愚蠢白 痴工人 Decreasing Marginal Returns (DMR) Negative M - Returns (AVC) Average variable costs are decreasing (AVC) Average variable costs are increasing Each worker costs less since each one is producing more Each worker costs more since each one is producing less Increasing Marginal Returns
(MPL)=1 好 工 人 (MPL)=2 好 工 人 (MPL)=4 好 工 人 (MPL)=3 好 工 人 (MPL)=1 不 好 工 人 (MPL)=0 白痴 工人 (MPL)=-1 愚蠢白 痴工人 Negative ReturnsMP AP MP AP
(MPL)=1 好 工 人 (MPL)=2 好 工 人 (MPL)=4 好 工 人 (MPL)=3 好 工 人 (MPL)=1 不 好 工 人 (MPL)=0 白痴 工人 (MPL)=-1 愚蠢白 痴工人 Negative ReturnsMP AP MC AVC MP AP MC AVC
AP But also as average product continues to rises, and average variable cost continues to fall. Cost Curves and Product Curves Then, at the point of maximum average product, average variable cost is a minimum. Highest AP Lowest AVC As the firm hires even more labor, average product decreases and average variable cost increases. WHILE AVC Workers AP AVCTHEN
At small outputs, MP and AP rise MC and AVC fall. At intermediate outputs, MP falls and MC rises AP rises and AVC falls. At large outputs, MP and AP fall MC and AVC rise.
A firm’s average variable cost curve is linked to its average product curve. If (AP) average product rises, (AVC) average variable cost falls. If (AP) average product is a maximum, (AVC) average variable cost is a minimum.
Short Run Cost Curves Shifts Technology In the short run these curves have twoIn the short run these curves have two reasons why they shift.reasons why they shift. Prices of Factors of Production
Technology A technological change that increases productivity shifts the total product curve upward. It also shifts the marginal product curve and the average product curve upward. With a better technology, the same inputs can produce more output, so an advance in technology lowers the average and marginal costs and shifts the short-run cost curves downward. Short Run Cost Curves Shifts
Things sure have changed, and becomeThings sure have changed, and become cheaper for people and more people havecheaper for people and more people have access to some pretty cool things.access to some pretty cool things.
Technology Shift upwardsShift upwards Short Run Cost Curves Shifts increasedincreased productivityproductivity APMPTP MC ACTC Typically shifts downwardsTypically shifts downwards
Short Run Cost Curves Shifts Prices of Factors of Production An increase in the price of a factor of productionAn increase in the price of a factor of production increases costs and shifts the cost curves.increases costs and shifts the cost curves. But how the curves shift depends on which resourceBut how the curves shift depends on which resource price changesprice changes..
So is it fixed costs thatSo is it fixed costs that change?change?
Or is it variable costs thatOr is it variable costs that change?change?
Short Run Cost Curves Shifts Prices of Factors of Production An increase in rent or another component of fixed cost Shifts the fixed cost curves (TFC and AFC) Shifts the total cost curve (TC and ATC) Leaves the variable cost curves (AVC and TVC) and the marginal cost curve (MC) unchanged.
Factory Workers Variable cost Fixed cost $100 Fixed cost change example –Fixed cost change example – you own the factory but not theyou own the factory but not the land, you have to rent it from aland, you have to rent it from a landlordlandlord You pay
Factory Workers Pay me more Rent! Variable cost Fixed cost $100 $1000 Now you pay
Short Run Cost Curves Shifts Prices of Factors of Production An increase in rent or another component of fixed cost Shifts the fixed cost curves (TFC and AFC) Shifts the total cost curve (TC and ATC) Leaves the variable cost curves (AVC and TVC) and the marginal cost curve (MC) unchanged.
Short Run Cost Curves Shifts Prices of Factors of Production An increase in the wage rate or another component of variable cost Shifts the variable curves (TVC and AVC) Shifts the marginal cost curve (MC) Shifts the total cost curve (TC and ATC) Leaves the fixed cost curves (AFC and TFC) unchanged.
Factory Workers Variable cost Fixed cost $20 for each strike Not fair Variable cost change exampleVariable cost change example – the workers strike to get– the workers strike to get more moneymore money
Factory Workers More Pay! Variable cost Fixed cost $20 for each $40 for each strike Not fair
Short Run Cost Curves Shifts Prices of Factors of Production An increase in the wage rate or another component of variable cost Shifts the variable curves (TVC and AVC) Shifts the marginal cost curve (MC) Shifts the total cost curve (TC and ATC) Leaves the fixed cost curves (AFC and TFC) unchanged.
Short Run Long Run - Input quantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital 2.) Variable costs L - labor - Input whose quantity the firm can vary at any time. Ex. Labor can change, you can fire or hire workers. - All inputs can be varied. - What matters is the scale 1.) Everything is variable!
Profit = Total revenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost That’s it for now for short run costs, a lotThat’s it for now for short run costs, a lot of kinds, hope you enjoyed it! Thanksof kinds, hope you enjoyed it! Thanks 

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Short run costs SFLS

  • 1.
  • 2.
  • 3.
  • 4.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs
  • 5.
    Defining Total Costs ExplicitCosts (accounting costs) -Cost paid is cash. ( just the money itself )
  • 6.
    Defining Total Costs ExplicitCosts (accounting costs) -Cost paid is cash. ( just the money itself ) Implicit Costs (opportunity costs) - The opportunity costs where real money is not exchanged. -Also the cost of factors of production that change where no real money is exchanged. ( example – Depreciation ) - Also includes a normal profit
  • 7.
    Defining Total Costs ExplicitCosts (accounting costs) -Cost paid is cash. ( just the money itself ) Implicit Costs (opportunity costs) - The opportunity costs where real money is not exchanged. -Also the cost of factors of production that change where no real money is exchanged. ( example – Depreciation ) - Also includes a normal profit Normal Profit – willNormal Profit – will be a significantbe a significant issue for later toissue for later to understandunderstand
  • 8.
    Explicit vs. ImplicitCosts: An Example You need 100,000 to start your business. The interest rate is 5%. Case 1: borrow 100,000 explicit cost = $5000 interest on loan Case 2: use $40,000 of your savings, borrow the other $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000.
  • 9.
    Explicit vs. ImplicitCosts: An Example You need 100,000 to start your business. The interest rate is 5%. Case 1: borrow 100,000 explicit cost = $5000 interest on loan Case 2: use $40,000 of your savings, borrow the other $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000. In both cases, total (explicit + implicit) costs are $5000.
  • 10.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)Depreciation
  • 11.
    Defining Total Costs ImplicitCosts Depreciation - Things lose value over time, an old machine is not worth as much as a new one. - It is an implicit cost
  • 12.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit
  • 13.
    Defining Profit Accountant Profit -(TR) total revenue minus (explicit cost + depreciation)
  • 14.
    Defining Profit Accountant Profit EconomicProfit - A firm’s (TR) total revenue minus total costs ( Explicit + Implicit)
  • 15.
    Defining Profit Accountant Profit NormalProfit -The opportunity cost of doing something else with the factors of production. -The returns of entrepreneurship -In graphs later this will equal zero (0), which will equal MR= MC Economic Profit
  • 16.
    Defining Profit Accountant Profit NormalProfit -The opportunity cost of doing something else with the factors of production. -The returns of entrepreneurship -In graphs later this will equal zero (0), which will equal MR= MC Economic Profit Normal Profit – isNormal Profit – is considered a costconsidered a cost for an economist, itfor an economist, it is the opportunityis the opportunity cost of timecost of time
  • 17.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit
  • 18.
    Two Views ofTotal Costs (Explicit costs + all Implicit costs = Total Costs) The Accounting View: (Explicit Costs + depreciation = Total Costs) The Economic View: It is not just the money but also the opportunity costs. Add up all your costs and add up all your revenue but also include your opportunity costs or doing something else instead. It is only about the money, add up your costs and up your revenue and ask did you make money? Two views on what costs are:
  • 19.
    The Accounting Viewof Total Costs: b.) Add up you explicit costs. - Explicit costs is the actual money. c.) Add up your depreciation. - Depreciation is the degradation of capital. a.) Add up all your profit. If it’s positive you made money If it’s negative you lost money d.) Add B and C together a minus it from A a – (b + c) = economic profit (accountant profit) - Your total revenue earned
  • 20.
    Do the exactsame thing as an accountant would do But don’t forget your opportunity cost of doing something else. b.) Add up you explicit costs c.) Add up all of your implicit costs a.) Add up all your profit - Depreciation + Normal Profit The Economists View of Total Costs: - All the actual money - Your total revenue If it’s positive you made money If it’s negative you lost money If it’s zero you made a normal profit d.) Add B and C together a minus it from A a – (b + c) = economic profit
  • 21.
  • 22.
  • 23.
  • 24.
  • 25.
    The equilibrium renton office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if a. you rent your office space b. you own your office space Economic profit vs. Accounting profit Example:
  • 26.
    The rent onoffice space increases $500/month. a.You rent your office space. Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month. Answers 26 Example:
  • 27.
    The rent onoffice space increases $500/month. b. You own your office space. Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month. Answers 27 Example:
  • 28.
    The rent onoffice space increases $500/month. b. You own your office space. Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month. Answers 28 Example: What if the rent increased by 1 million? IfWhat if the rent increased by 1 million? If you keep your business there, then youyou keep your business there, then you lose the opportunity to earn that, youlose the opportunity to earn that, you could rent it out and move your businesscould rent it out and move your business to a cheaper officeto a cheaper office
  • 29.
    In 2012, Tonitaught music and earned 32,000RMB. She also earned 14,000RMB by renting out her basement. On January 1, 2013, she quit teaching, stopped renting out her basement, and began to use it as the office for her new Website business. She took 2,000RMB from her savings account to buy a computer. During 2013, she paid 1,500RMB for the lease of a Web server and 1,750RMB for high-speed internet service. She received a total revenue from website designing of 45,000RMB and earned interest at 5% a year on her savings account. At the end of 2013, Toni could have sold her computer for 500RMB. a. Calculate Toni’s explicit costs and implicit costs in 2013. b. Calculate Toni’s economic profit in 2013. Another Example:
  • 30.
    a. Explicit costsare the $1,500 for the lease of a Web server and $1,750 for high speed Internet service. The total explicit costs are‐ $3,250. The implicit costs are the $32,000 in wages forgone, the $14,000 in rent forgone, the $100 in forgone interest payments on the savings, and the $1,500 in economic depreciation for the computer. The total implicit costs are $47,600. b. The economic profit equals total revenue minus total opportunity costs, which is $45,000 − ($3,250 + $47,600) = − $5,850. Toni incurred an economic loss of $5,850 for the year. Answers Example:
  • 31.
    Short Run Long Run Typesof Costs Through Time
  • 32.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable
  • 33.
    Factory An example ofsomeAn example of some business costsbusiness costs Let’s say you are the ownerLet’s say you are the owner of a factoryof a factory
  • 34.
  • 35.
  • 36.
    Factory I want a bigger factory today Soyou want to “grow”So you want to “grow” your factoryyour factory
  • 37.
  • 38.
    Factory In the shortrun some costs are fixed – they can’t be changed
  • 39.
    Short Run - Inputquantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital
  • 40.
    Factory Workers Now forexample, let’sNow for example, let’s look at the workers inlook at the workers in your factoryyour factory
  • 41.
  • 42.
    Factory Workers I wantmore workers! 加 加 加 加 加 加 加 加
  • 43.
  • 44.
  • 45.
    Short Run - Inputquantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital 2.) Variable costs L - labor - Input whose quantity the firm can vary at any time. Ex. Labor can change, you can fire or hire workers. You can add workers and removeYou can add workers and remove workers anytime, but you can’t justworkers anytime, but you can’t just make your factory bigger or smaller atmake your factory bigger or smaller at anytime.anytime.
  • 46.
    Like a Boss! FactoryWorkers Fixed Costs Variable Costs
  • 47.
    Short Run Long Run -Input quantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital 2.) Variable costs L - labor - Input whose quantity the firm can vary at any time. Ex. Labor can change, you can fire or hire workers. - All inputs can be varied. - What matters is the scale 1.) Everything is variable!
  • 48.
    -To produce moreoutput in the short run, a firm employs more labor, which means the firm must increase its costs. Short Run Costs (TC) Total Cost (MC) Marginal Cost (AC) Average Cost
  • 49.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost (MC) Marginal Cost (AC) Average Cost
  • 50.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
  • 51.
    (TC) Total Cost- is the cost of all the factors of production the firm uses. (TFC) Total Fixed Cost - cost of land, capital, and entrepreneurship. -total fixed cost doesn’t change as output changes Short Run Costs
  • 52.
    What is the (TFC)Total Fixed Cost?
  • 53.
    What is the (TFC)Total Fixed Cost? = 10 The cost you will have no matter what the output is
  • 54.
    Total fixed cost (TFC) isconstant it graphs as a horizontal line.
  • 55.
    (TC) Total Cost (TFC)Total Fixed Cost Short Run Costs (TVC) Total Variable Cost - cost of labor. - To change its output in the short run, a firm must change the quantity of labor it employs, so total variable cost changes as output changes.
  • 56.
    1.) What isthe (TVC) total variable costs at an output of 1? 2.) What is the (TVC) total variable costs at an output of 3? 3.) What is the (TVC) total variable costs at an output of 6?
  • 57.
    1.) What isthe (TVC) total variable costs at an output of 1? 2.) What is the (TVC) total variable costs at an output of 3? 3.) What is the (TVC) total variable costs at an output of 6? 6 12 18
  • 59.
    Total cost (TC) alsoincreases as output increases. Total variable cost (TVC) increases as output increases.
  • 60.
    (TC) Total Cost (TFC)Total Fixed Cost (TVC) Total Variable Cost + =
  • 61.
    (MC) Marginal Cost ShortRun Costs - is the change in total cost that results from a one- unit increase in total product. - Marginal cost tells us how total cost changes as total product changes. (TC) Total Cost ______________TCTC QQ ______________- Total cost - Quantity of output
  • 63.
    (AC) Average Cost- is (TC) per unit of output. (AFC) Average Fixed Cost is (TFC) per unit of output. Short Run Costs (TC) Total Cost (MC) Marginal Cost __________TFCTFC QQ __________________- Fixed cost - Quantity of output
  • 65.
    Average fixed cost (AFC)decreases as output increases.
  • 66.
    Short Run Costs (TC)Total Cost (AVC) Average Variable Cost is (TVC) per unit of output. - is (TC) per unit of output. (AFC) Average Fixed Cost is (TFC) per unit of output. (MC) Marginal Cost (AC) Average Cost
  • 67.
    Short Run Costs (TC)Total Cost (AVC) Average Variable Cost is (TVC) per unit of output. - is (TC) per unit of output. (AFC) Average Fixed Cost is (TFC) per unit of output. (MC) Marginal Cost (AC) Average Cost __________TVCTVC QQ __________________- Total Fixed cost - Quantity of output
  • 69.
    Average fixed cost (AFC)decreases as output increases. The average variable cost curve (AVC) is U- shaped.
  • 71.
    (AC) Average Cost (AFC)Average Fixed Cost (AVC) Average Variable Cost + =
  • 72.
    (MC) Marginal Cost MC= Q TC - is the change in total cost that results from a one-unit increase in total product. - Marginal cost tells us how total cost changes as total product changes.
  • 73.
    The (MC) marginal costcurve is U- shaped and intersects the (AVC) average variable cost curve and the (ATC) average total cost curve at their minimum points.
  • 74.
    Short Run Costs Whythe (ATC) Average Total Cost Curve Is U-Shaped The U shape of the average total cost curve arises from the influence of two opposing forces: 1.) Spreading total fixed cost over a larger output 2.) Decreasing marginal returns (DMR)
  • 75.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost
  • 76.
    Linking the Cost Curvesand Product Curves
  • 77.
    A firm’s marginalcost curve is linked to its marginal product curve. If marginal product rises, marginal cost falls. If marginal product is a maximum, marginal cost is a minimum.
  • 78.
    A firm’s averagevariable cost curve is linked to its average product curve. If (AP) average product rises, (AVC) average variable cost falls. If (AP) average product is a maximum, (AVC) average variable cost is a minimum.
  • 79.
    A firm’s averagevariable cost curve is linked to its average product curve. If (AP) average product rises, (AVC) average variable cost falls. If (AP) average product is a maximum, (AVC) average variable cost is a minimum. They are a mirror oppositeThey are a mirror opposite of each other. So theof each other. So the maximum and minimummaximum and minimum points are at the samepoints are at the same output points.output points.
  • 80.
    Workers MCAPMP Then, at thepoint of maximum marginal product, marginal cost is a minimum. Highest MP Lowest MC As the firm hires more labor, marginal product decreases and marginal cost increases. Workers At low levels of employment and output, as the firm hires more labor, marginal product and average product rise, and marginal cost and average variable cost fall. Cost Curves and Product Curves AVC MP AP MC AVC
  • 81.
  • 82.
    (MPL)=1 好 工 人 (MPL)=2 好 工 人 (MPL)=4 好 工 人 (MPL)=3 好 工 人 (MPL)=1 不 好 工 人 (MPL)=0 白痴 工人 (MPL)=-1 愚蠢白 痴工人 Decreasing Marginal Returns (DMR) Negative M- Returns (AVC) Average variable costs are decreasing (AVC) Average variable costs are increasing Each worker costs less since each one is producing more Each worker costs more since each one is producing less Increasing Marginal Returns
  • 83.
  • 84.
  • 85.
    AP But also asaverage product continues to rises, and average variable cost continues to fall. Cost Curves and Product Curves Then, at the point of maximum average product, average variable cost is a minimum. Highest AP Lowest AVC As the firm hires even more labor, average product decreases and average variable cost increases. WHILE AVC Workers AP AVCTHEN
  • 86.
    At small outputs, MPand AP rise MC and AVC fall. At intermediate outputs, MP falls and MC rises AP rises and AVC falls. At large outputs, MP and AP fall MC and AVC rise.
  • 87.
    A firm’s averagevariable cost curve is linked to its average product curve. If (AP) average product rises, (AVC) average variable cost falls. If (AP) average product is a maximum, (AVC) average variable cost is a minimum.
  • 88.
    Short Run CostCurves Shifts Technology In the short run these curves have twoIn the short run these curves have two reasons why they shift.reasons why they shift. Prices of Factors of Production
  • 89.
    Technology A technological changethat increases productivity shifts the total product curve upward. It also shifts the marginal product curve and the average product curve upward. With a better technology, the same inputs can produce more output, so an advance in technology lowers the average and marginal costs and shifts the short-run cost curves downward. Short Run Cost Curves Shifts
  • 91.
    Things sure havechanged, and becomeThings sure have changed, and become cheaper for people and more people havecheaper for people and more people have access to some pretty cool things.access to some pretty cool things.
  • 92.
    Technology Shift upwardsShift upwards ShortRun Cost Curves Shifts increasedincreased productivityproductivity APMPTP MC ACTC Typically shifts downwardsTypically shifts downwards
  • 93.
    Short Run CostCurves Shifts Prices of Factors of Production An increase in the price of a factor of productionAn increase in the price of a factor of production increases costs and shifts the cost curves.increases costs and shifts the cost curves. But how the curves shift depends on which resourceBut how the curves shift depends on which resource price changesprice changes..
  • 94.
    So is itfixed costs thatSo is it fixed costs that change?change?
  • 95.
    Or is itvariable costs thatOr is it variable costs that change?change?
  • 96.
    Short Run CostCurves Shifts Prices of Factors of Production An increase in rent or another component of fixed cost Shifts the fixed cost curves (TFC and AFC) Shifts the total cost curve (TC and ATC) Leaves the variable cost curves (AVC and TVC) and the marginal cost curve (MC) unchanged.
  • 97.
    Factory Workers Variable cost Fixedcost $100 Fixed cost change example –Fixed cost change example – you own the factory but not theyou own the factory but not the land, you have to rent it from aland, you have to rent it from a landlordlandlord You pay
  • 98.
    Factory Workers Pay me more Rent! Variablecost Fixed cost $100 $1000 Now you pay
  • 99.
    Short Run CostCurves Shifts Prices of Factors of Production An increase in rent or another component of fixed cost Shifts the fixed cost curves (TFC and AFC) Shifts the total cost curve (TC and ATC) Leaves the variable cost curves (AVC and TVC) and the marginal cost curve (MC) unchanged.
  • 100.
    Short Run CostCurves Shifts Prices of Factors of Production An increase in the wage rate or another component of variable cost Shifts the variable curves (TVC and AVC) Shifts the marginal cost curve (MC) Shifts the total cost curve (TC and ATC) Leaves the fixed cost curves (AFC and TFC) unchanged.
  • 101.
    Factory Workers Variable cost Fixed cost $20for each strike Not fair Variable cost change exampleVariable cost change example – the workers strike to get– the workers strike to get more moneymore money
  • 102.
    Factory Workers More Pay! Variable cost Fixedcost $20 for each $40 for each strike Not fair
  • 103.
    Short Run CostCurves Shifts Prices of Factors of Production An increase in the wage rate or another component of variable cost Shifts the variable curves (TVC and AVC) Shifts the marginal cost curve (MC) Shifts the total cost curve (TC and ATC) Leaves the fixed cost curves (AFC and TFC) unchanged.
  • 104.
    Short Run Long Run -Input quantity is fixed for a period of time and cannot be varied. ( include sunk costs) Types of Costs Through Time Ex. You can’t change technology and capital that quickly. 1.) Fixed costs K – capital 2.) Variable costs L - labor - Input whose quantity the firm can vary at any time. Ex. Labor can change, you can fire or hire workers. - All inputs can be varied. - What matters is the scale 1.) Everything is variable!
  • 105.
    Profit = Totalrevenue – Total cost Costs summary:__________________________ Goods and Services produced Time Production summary:____________________ (TP) Total Product (MP) Marginal Product (AP) Average Product (MP or MPL) Marginal Product of Labor (DMR) Decreasing Marginal Returns Explicit Costs Implicit Costs 1.)DepreciationEconomic Profit 2.) Normal Profit Accountant Profit Short Run 1.)Fixed Costs 2.)Variable Costs Long Run 1.) All Variable (TC) Total Cost 1.) TFC) Total Fixed cost 2.) (TVC) Total Variable cost (MC) Marginal Cost (AC) Average Cost 1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost That’s it for now for short run costs, a lotThat’s it for now for short run costs, a lot of kinds, hope you enjoyed it! Thanksof kinds, hope you enjoyed it! Thanks 

Editor's Notes

  • #9 In Case 2, the foregone interest is the interest you could have earned on your savings. It is an opportunity cost. This example shows that an important implicit cost is the cost of capital, the foregone returns you could have earned had you used your savings to buy bonds or other assets instead of investing them in your business. The hope is that students will see that what really matters to them is not just the explicit costs, but total (implicit + explicit) costs.
  • #10 In Case 2, the foregone interest is the interest you could have earned on your savings. It is an opportunity cost. This example shows that an important implicit cost is the cost of capital, the foregone returns you could have earned had you used your savings to buy bonds or other assets instead of investing them in your business. The hope is that students will see that what really matters to them is not just the explicit costs, but total (implicit + explicit) costs.