diminishing marginal returns fc vs vc
TRANSCRIPT
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Bellringer
1. Get out your project and finish it
Today is your last day in class to work on it. After Wed. 10/16 it will be late and I will
deduct 30% off your project grade
2. Work on the three other assignments, oil packet, price ceilings or Atari. Or review
TRIBE and PEST and review your quiz #3
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BellringerReview: Utility, Marginal
1. Draw a small chart in your notes showing your level of alertness throughout your school day on a Monday. 0 being not alert and 10 being “top of
your game”
1st 0-10
2nd 0-10
3rd 0-10
4th 0-10
5th 0-10
6th 0-10
Mankiw Chapter 13 Costs
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Law of Diminishing Marginal Returns
• Benefit of extra input decreases from the last
• Songs
• Movies
• Video games
• Alcohol
• Being in school
• Studying
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• Costs!
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THE COSTS OF PRODUCTION
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Total Revenue, Total Cost, Profit
• We assume that the firm’s goal is to maximize profit.
Profit = Total revenue – Total cost
the amount a firm receives from the sale of its output
the market value of the inputs a firm uses in production
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THE COSTS OF PRODUCTION
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Costs: Explicit vs. Implicit• Explicit costs require an outlay of money,e.g., paying wages to workers.
• Implicit costs do not require a cash outlay,e.g., the opportunity cost of the owner’s time.
• Remember one of the Ten Principles: The cost of something is what you give up to get it.
• This is true whether the costs are implicit or explicit. Both matter for firms’ decisions.
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THE COSTS OF PRODUCTION
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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 (exp + imp) costs are $5000.
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THE COSTS OF PRODUCTION
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Economic Profit vs. Accounting Profit
• Accounting profit = total revenue minus total explicit costs
• Economic profit= total revenue minus total costs (including
explicit and implicit costs)
• Accounting profit ignores implicit costs, so it’s higher than economic profit.
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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
A C T I V E L E A R N I N G A C T I V E L E A R N I N G 22
Economic profit vs. accounting profitEconomic profit vs. accounting profit
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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.
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.
A C T I V E L E A R N I N G A C T I V E L E A R N I N G 22
AnswersAnswers
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An unsuccessful business
• Costs that they can change tomorrow
• Costs that they can’t change
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Let’s think more specifically about costs
• Fixed Costs = costs that do not change based on production and don’t change in SR
• Examples: capital goods, tools, buildings, menus
Nokia factory in Finland
Coke factory in Atlanta, Georgia
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BR Quiz1. Write 3 examples of FC for this firm
2. Write 3 examples of VC for this firm
3. How could this firm increase its TR?
4. Give an example of diminishing marginal returns from your life
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Special fixed costs
• “Entry costs” – costs to start up the business
Business with lowEntry costs
Business with very highEntry costs
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Costs we can change in the short run
Variable costs = costs that change based on production
The more I produce, the more cost I will incur.
If I don’t produce at all, my variable costs will be 0
For example: labor, electricity, raw materials
Nike factory in China
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Michael Jordan visiting Nike Factory in 1999 Why produce in China?
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Marginal Costs
• Marginal costs = the cost of producing 1 additional unit
• For example:
• Why helpful?• Diminishing
marginal product!
Widgets
01234
FC
11111
VC
06
111622
MC
X
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Total Costs
• Total Costs = fixed + variable costsFor example:
Widgets
01234
FC
11111
VC
01235
TC
12346
MC
X1112
Revenue
02468
Assume Widgets price
$2/eachProfit
-10122
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Averages
• Do you guys bring up or down the GPA of all of Pueblo high school?
• Does the track and field team bring up or down the average weight of Pueblo High School?
• Does a high average cost of living mean that everyone spends a lot to live in California?
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Average Costs• Average Fixed Costs = FC/Q
• Average Variable Costs = VC/Q
• ATC = TC/Q
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Group assignment1
2
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Groups page 276
Problem #4Problem #6