7. Economists versus Accountants How an Economist Views a Firm How an Accountant Views a Firm Revenue Total opportunity costs Revenue Economic profit Implicit costs Explicit costs Explicit costs Accounting profit
17. Example 1: Farmer Jack’s Production Function 0 0 500 1,000 1,500 2,000 2,500 3,000 0 1 2 3 4 5 No. of workers Quantity of output 3000 5 2800 4 2400 3 1800 2 1000 1 0 0 Q (bushels of wheat) L (no. of workers)
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19. EXAMPLE 1: Total & Marginal Product 200 400 600 800 1000 MP L 0 3000 5 2800 4 2400 3 1800 2 1000 1 0 0 Q (bushels of wheat) L (no. of workers) ∆ Q = 1000 ∆ L = 1 ∆ Q = 800 ∆ L = 1 ∆ Q = 600 ∆ L = 1 ∆ Q = 400 ∆ L = 1 ∆ Q = 200 ∆ L = 1
20. EXAMPLE 1: MP L = Slope of Prod Function MP L equals the slope of the production function. Notice that MP L diminishes as L increases. This explains why the production function gets flatter as L increases. 3000 5 200 2800 4 400 2400 3 600 1800 2 800 1000 1 1000 0 0 MP L Q (bushels of wheat) L (no. of workers) 0 0 500 1,000 1,500 2,000 2,500 3,000 0 1 2 3 4 5 No. of workers Quantity of output
57. EXAMPLE 1: The Marginal Cost Curve MC usually rises as Q rises, as in this example. $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 TC MC 3000 2800 2400 1800 1000 0 Q (bushels of wheat) $10.00 $5.00 $3.33 $2.50 $2.00
61. EXAMPLE 2: Marginal Cost Recall, Marginal Cost ( MC ) is the change in total cost from producing one more unit: Usually, MC rises as Q rises, due to diminishing marginal product. Sometimes (as here), MC falls before rising. (In other examples, MC may be constant.) 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 MC TC Q 140 100 70 50 40 50 $70 ∆ TC ∆ Q MC =
62. EXAMPLE 2: Average Fixed Cost 100 7 100 6 100 5 100 4 100 3 100 2 100 1 $100 0 AFC FC Q Average fixed cost ( AFC ) is the fixed cost per unit of the quantity of output: AFC = FC / Q Notice that AFC falls as Q rises: The firm is spreading its fixed costs over a larger and larger number of units. 0 14.29 16.67 20 25 33.33 50 $100 n.a.
63. EXAMPLE 2: Average Variable Cost 520 7 380 6 280 5 210 4 160 3 120 2 70 1 $0 0 AVC VC Q Average variable cost ( AVC ) is the variable cost per unit of the output: AVC = VC / Q As Q rises, AVC may fall initially. In most cases, AVC will eventually rise as output rises. 0 74.29 63.33 56.00 52.50 53.33 60 $70 n.a.
64. EXAMPLE 2: Average Total Cost [a.k.a. Average Cost] ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 TC Q 0 Average total cost ( ATC ) is the total cost per unit of the output: ATC = TC / Q Also, ATC = AFC + AVC 88.57 80 76 77.50 86.67 110 $170 n.a. 74.29 14.29 63.33 16.67 56.00 20 52.50 25 53.33 33.33 60 50 $70 $100 n.a. n.a. AVC AFC
65. EXAMPLE 2: Average Total Cost Usually, as in this example, the ATC curve is U-shaped. 88.57 80 76 77.50 86.67 110 $170 n.a. ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 TC Q 0 $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
66. EXAMPLE 2: The Various Cost Curves Together 0 AFC AVC ATC MC $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
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69. EXAMPLE 2: Why ATC Is Usually U-Shaped 0 As Q rises: Initially, falling AFC pulls ATC down. Eventually, rising AVC pulls ATC up. $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
70. EXAMPLE 2: ATC and MC 0 When MC < ATC , ATC is falling. When MC > ATC , ATC is rising. The MC curve crosses the ATC curve at the ATC curve’s minimum. That is, when MC=AC, ATC is at its minimum. ATC MC $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
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72. EXAMPLE 3: LRATC with 3 factory Sizes Firm can choose from 3 factory sizes: S , M , L . Each size has its own SRATC curve. The firm can change to a different factory size in the long run, but not in the short run. ATC S ATC M ATC L Q Avg Total Cost
73. EXAMPLE 3: LRATC with 3 factory Sizes LRATC To produce less than Q A , firm will choose size S in the long run. To produce between Q A and Q B , firm will choose size M in the long run. To produce more than Q B , firm will choose size L in the long run. ATC S ATC M ATC L Q Avg Total Cost Q A Q B
74. A Typical LRATC Curve In the real world, factories come in many sizes, each with its own SRATC curve. So a typical LRATC curve looks like this: Q ATC LRATC
75. How ATC Changes As the Scale of Production Changes Economies of scale : ATC falls as Q increases. Constant returns to scale : ATC stays the same as Q increases. Diseconomies of scale : ATC rises as Q increases. LRATC Q ATC
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Hinweis der Redaktion
In this case, 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.
Thinking at the margin helps not only Jack, but all managers in the real world, who make business decisions every day by comparing marginal costs with marginal benefits.
A lighter look at an instance of cost-benefit analysis in real life. This billboard of a jeweler was seen in the town of Charleston, SC, in the United States.
NOTES: ON OCT 26, 2009, STOP AT SLIDE 58 (INCLUDED FOR IInd INTERNAL EXAM) FOR SECTION A.
Point out that the TC curve is parallel to the VC curve, but is higher by the amount FC.
Many students have heard the terms “cost per unit” or “unit cost” in other business courses. ATC means the same thing.