2. Unit 5 - Cost Functions
• Economic versus Accounting Profits
Economic profits equal total revenue minus
all (explicit and implicit) costs.
Accounting profits equal total revenue minus
explicit costs.
Microeconomics
3. Unit 5 - Cost Functions
• Economic versus Accounting Profits
Example 2:
If a firm’s total revenue is $80,000, and its
explicit and implicit costs are $70,000 and
$25,000, respectively, what are its economic
and accounting profits?
Microeconomics
4. Unit 5 - Cost Functions
• Total and Per Unit Costs
Total and per unit economic costs include:
– Total Variable Cost (TVC)
– Total Fixed Cost (TFC)
– Total Cost (TC)
– Average Variable Cost (AVC)
– Average Fixed Cost (AFC)
– Average Total Cost (ATC)
– Marginal Cost (MC)
Microeconomics
5. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 1
If TVC + TFC = TC, and TVC and TFC are
$900 and $300, respectively, what is TC?
Microeconomics
6. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 1 answer
Total Variable Cost $900
Total Fixed Cost $300
+ +
Total Cost $1200
Microeconomics
7. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 2
If TC is $1,200 and production is 50, what is
ATC?
Microeconomics
8. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 2 answer
ATC =
Microeconomics
Q
$1200
50
TC
= = $24
9. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 3
If production is 50, and total variable and total
fixed cost are $900 and $300, respectively,
what are average variable cost and average
fixed cost? (Output = 50).
Microeconomics
10. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 3 answer
Average variable cost =
Average fixed cost =
Microeconomics
$900
50
=$18
$300
50
=$6
11. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 4
Using the data in the previous examples, let’s
say that you produce an additional 5
products, and your total cost rises to $1260,
what is your marginal cost?
Microeconomics
12. Unit 5 - Cost Functions
• Total and Per Unit Costs
Example 4 answer
Marginal cost =
Microeconomics
change in total cost
change in production
=
$60
5
= $12
13. Unit 5 - Cost Functions
• Cost Calculations
Example 5 - Fill in the missing values
Microeconomics
Q TC TVC TFC ATC AVC AFC MC
0 80
1 80
2 110
3 70
4 90
16. • The Long-run Average Cost Curve
In the long run, all inputs are variable. A firm
has enough time to choose the size of its
factory, farm, office building, or other capital
goods.
The firm can choose from many short-run
cost curves. The bottom points of the short-
run average cost curves make up the long-
run average cost curve.
Microeconomics
Unit 5 - Cost Functions
17. Unit 5 - Cost Functions
• The Long-run Average Cost Curve
Long-run average costs fall as production first rises.
This is called economies of scale (EOS).
When the firm gets too big, long-run average costs
rise. This is called diseconomies of scale (DOS).
Microeconomics
EOS DOS
Average
Costs
Quantity
Produced
18. • Returns to Scale
When inputs increase, and production more
than proportionately increases, then we
speak of increasing returns to scale
(associated with economies of scale).
Example
Inputs increase by 10%, and production
increases by 20%.
Microeconomics
Unit 5 - Cost Functions
19. • Returns to Scale
When inputs increase, and production less
than proportionately increases, then we
speak of decreasing returns to scale
(associated with diseconomies of scale).
Example
Inputs increase by 10%, and production
increases by 5%.
Microeconomics
Unit 5 - Cost Functions
