the costs of production (chapter 21) happy march… one week until spring break>>>
TRANSCRIPT
The Costs of Production
(Chapter 21)
HAPPY MARCH… ONE WEEK UNTIL SPRING
BREAK>>>
Scoresheet Section: AP MICROECO 21
3rd Cycle-6wk-PR6
Quiz 1Feb 4, 2013% 100
Chapters 1-3 HW OutlinesFeb 5, 2013% 100
Unit 1 ExamFeb 8, 2013% 100
Personal Business Project IFeb 10, 2013% 100
Activities 9 & 13Feb 18, 2013% 100
Activity 14Feb 18, 2013% 100
Activity 2Feb 18, 2013% 100
Quiz 2Feb 22, 2013% 100
AP Economics Exam 2Feb 26, 2013% 100
Shadenfreude ProjectFeb 28, 2013% 100
280288 B 84% 85% 100% 80% 70% 84% 100% 100% 90% 82.50% 100%
285165 F 58% 75% 90% 63% 0% 56% 70% 100% 0% 42% 80%
285205 F 64% 65% 95% 72% 50% 68% 50% 100% 65% 40% 80%
739677 C 76% 85% 99% 79% 88% 72% 50% 100% 65% 63.50% 90%
740118 D 73% 80% 100% 83% 0% 84% 75% 100% 60% 59% 90%
741028 C 77% 95% 95% 87% 61% 80% 50% 100% 65% 63% 100%
751177 F 65% 80% 80% 80% 62% 68% 50% 100% 0% 50% 70%
751325 D 71% 85% 99% 85% 85% 68% 60% 100% 0% 53.50% 70%
751357 A 92% 100% 100% 91% 100% 96% 100% 100% 90% 91.50% 100%
751358 D 71% 88% 90% 80% 70% 80% 50% 100% 83% 47% 85%
752018 B 81% 100% 100% 80% 100% 88% 60% 100% 90% 67% 85%
752387 C 78% 90% 100% 79% 88% 72% 50% 100% 0% 79% 90%
752761 D 73% 75% 100% 79% 100% 64% 70% 100% 0% 62.50% 85%
755537 D 70% 80% 100% 75% 85% 64% 70% 100% 88% 48% 90%
761413 D 71% 80% 80% 83% 60% 84% 80% 100% 0% 63% 70%
767485 F 67% 60% 80% 78% 0% 88% 100% 100% 0% 58% 80%
773721 F 66% 85% 90% 75% 60% 84% 60% 100% 0% 46% 90%
780990 C 76% 90% 90% 76% 88% 80% 75% 100% 0% 70% 85%
792886 F 63% 105% 0% 79.75% 0% 100% 75% 100% 0% 68% 70%
794714 D 72% 93% 80% 88% 81% 72% 50% 100% 0% 59% 90%
841405 65% 65% 85% 73% 76% 50% 100% 0% 44% 90%
875244 B 85% 90% 100% 92% 100% 100% 100% 100% 85% 62% 100%
926549 A 97% 100% 95% 100% 92% 76% 100% 100% 90% 100% 85%
Grading is not fun!!!
The Costs of Production
The Law of Supply:Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.This results in a supply curve that slopes upward.
The Firm’s Objective
The economic goal of the firm is to maximize profits.
A Firm’s Profit
Profit is the firm’s total revenue minus its total cost.
Profit = Total revenue - Total cost
Costs as Opportunity Costs
A firm’s cost of production includes all the opportunity costs of making its output of goods and
services.
Explicit and Implicit Costs
A firm’s cost of production include explicit costs and implicit costs.
Explicit costs involve a direct money outlay for factors of production. Implicit costs do not involve a direct money outlay.
Economic Profit versus Accounting Profit
When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than
accounting profit.
Economic Profit versus Accounting Profit
Revenue
Totalopportunitycosts
How an EconomistViews a Firm
Explicitcosts
Economicprofit
Implicitcosts
Explicitcosts
Accountingprofit
How an AccountantViews a Firm
Revenue
Total Revenue……….. $50,000Cost of making Cheetos…. $30,000Laborers' wages… $7,000Utilities… $5,000Total Explicit Costs… $42,00
8,000 is what?
BUT
Forgone interestForgone rentForgone wagesForgone entrepreneurial income
… These are examples of implicit costs which must be subtracted from accounting profit to figure economic profit
Ask yourself… Is it worth it?
Marginal Product
The marginal product of any input in the production process is the increase in the quantity of output obtained from an additional unit of that input.
Marginal Product
Additional input
Additional output=Marginalproduct
Diminishing Marginal ProductDiminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.
Diminishing Marginal Product
The slope of the production function measures the marginal product of an input, such as a worker.
As the marginal product declines, the total production curve slopes downward
From the Production Function to the Total-Cost Curve
The relationship between the quantity a firm can produce and its costs determines pricing decisions.
The total-cost curve shows this relationship graphically.
A Production Function and Total Cost
Number ofWorkers
Output MarginalProduct of
Labor
Cost ofFactory
Cost ofWorkers
Total Cost ofInputs
0 0 $30 $0 $30
1 50 50 30 10 40
2 90 40 30 20 50
3 120 30 30 30 60
4 140 20 30 40 70
5 150 10 30 50 80
Hungry Helen’s Cookie Factory
Total-Cost Curve...TotalCost
$80
70
60
50
40
30
20
10
Quantity of Output(cookies per hour)
0 20 40 1401201008060
Total-costcurve
The Various Measures of Cost
Costs of production may be divided into fixed costs and variable costs.
Fixed and Variable Costs
Fixed costs are those costs that do not vary with the quantity of output produced.
Variable costs are those costs that do change as the firm alters the quantity of output produced.
Family of Total Costs
Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC)
TC = TFC + TVC
Family of Total CostsQuantity Total Cost Fixed Cost Variable Cost
0 $ 3.00 $3.00 $ 0.001 3.30 3.00 0.302 3.80 3.00 0.803 4.50 3.00 1.504 5.40 3.00 2.405 6.50 3.00 3.506 7.80 3.00 4.807 9.30 3.00 6.308 11.00 3.00 8.009 12.90 3.00 9.90
10 15.00 3.00 12.00
Average Costs
Average costs can be determined by dividing the firm’s costs by the quantity of output produced.
The average cost is the cost of each typical unit of product.
Family of Average Costs
Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC)
ATC = AFC + AVC
Family of Average Costs
AFC=Fixed costQuantity
=FCQ
AVC=Variable cost
Quantity=
VCQ
ATC=Total costQuantity
=TCQ
AFC=Fixed costQuantity
=FCQ
AVC=Variable cost
Quantity=
VCQ
ATC=Total costQuantity
=TCQ