Chapter 13

Firm’s Goal ,[object Object],[object Object],[object Object]

Costs ,[object Object],[object Object]

Accounting Costs vs. Economic Costs ,[object Object],[object Object],[object Object],[object Object],[object Object]

Use the correct costs ,[object Object],[object Object],[object Object]

Alexander owns a small factory that makes fishing lures. He can make 1,000 lures per year and sell them for $100 each. Alexander pays $25,000 for raw materials to produce the 1,000 lures. He invested a total of $100,000 in the building and equipment: $50,000 of his own savings and $50,000 borrowed at 10 percent; his own money was earning 10 percent interest too. Alexander could work at a competing factory for $40,000. According to this information, Alexander's accounting profit is ,[object Object],[object Object],[object Object],[object Object],[object Object]

Alexander owns a small factory that makes fishing lures. He can make 1000 lures per year and sell them for $100 each. Alexander pays $25,000 for raw materials to produce the 1000 lures. He invested a total of $100,000 in the building and equipment: $50,000 of his own savings and $50,000 borrowed at 10 percent; his own money was earning 10 percent interest too. Alexander could work at a competing factory for $40,000. According to this information, Alexander's economic profit is ,[object Object],[object Object],[object Object],[object Object],[object Object]

What makes up costs? ,[object Object],[object Object],[object Object],[object Object]

Production ,[object Object],[object Object],[object Object]

Production Function ,[object Object],[object Object],[object Object],[object Object],[object Object]

Short Run ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Ice Cream Store ,[object Object],[object Object],[object Object]

Diminishing Returns ,[object Object],[object Object],[object Object],[object Object],[object Object]

Diminishing Returns ,[object Object],[object Object],[object Object],[object Object]

Example Are these numbers for output consistent with diminishing returns? Yes output increases at decreasing rate Would the firm ever hire 8 workers? No output decreases 128 8 5 147 7 5 144 6 5 125 5 5 96 4 5 63 3 5 32 2 5 9 1 5 0 0 5 Q L K

Marginal and Average Product Average Product=Q/L If L=1, AP=9/1=9 If L=2, AP=32/2=16 Marginal Product= ∆Q/∆L If L=1,MP=9-0/1-0=9 If L=2, MP=32-9/2-1=23 Where is diminishing returns? With 5 th worker, when MP falls 9 9 9 1 -19 16 128 8 3 21 147 7 19 24 144 6 29 25 125 5 33 24 96 4 31 21 63 3 23 16 32 2 - - 0 0 MP AP Q L

Graph of Marginal and Average Product Diminishing returns

Diminishing returns ,[object Object],[object Object],[object Object]

Marginal Product is slope of Total Product Curve 9 23

Labor Output 0 0 1 22 2 38 3 50 According to the table above, the marginal product of hiring the third worker is ,[object Object],[object Object],[object Object],[object Object],[object Object],According to the table below, the marginal product of hiring the third worker is

Short Run ,[object Object],[object Object],[object Object]

Total Product and Costs ,[object Object],[object Object]

Fixed Costs ,[object Object],[object Object]

Fixed Costs ,[object Object],[object Object],[object Object],[object Object],[object Object]

Variable Costs ,[object Object],[object Object],[object Object],[object Object]

Which of the following is most likely a fixed cost in the short run? ,[object Object],[object Object],[object Object],[object Object],[object Object]

Total Product 147 7 5 144 6 5 125 5 5 96 4 5 63 3 5 32 2 5 9 1 5 0 0 5 Q L K

Costs FC=Pk*K FC=50*5 VC=Pl*L VC=100*l 147 700 250 144 600 250 125 500 250 96 400 250 63 300 250 32 200 250 9 100 250 0 0 250 Q VC FC

VC=L*100 00 00 00 00 00 00 00 00 00

TP to VC ,[object Object],[object Object],[object Object]

Short Run Costs FC VC Q $ 250 TC TC=FC=VC

Costs 33.33 6.46 4.76 1.70 950 700 250 147 5.26 5.90 4.17 1.74 850 600 250 144 3.45 6.00 4.00 2.00 750 500 250 125 3.03 6.77 4.17 2.60 650 400 250 96 3.23 8.73 4.76 3.97 550 300 250 63 4.35 14.06 6.25 7.81 450 200 250 32 11.11 38.89 11.11 27.78 350 100 250 9 250 0 250 0 MC ATC AVC AFC TC V C F C Q MC= ∆TC/∆Q AFC=FC/Q AVC=VC/Q ATC=TC/Q TC=FC+VC VC=PL*L FC=Pk*K

Quantity of Output Fixed Costs Variable Costs 0 $10 $0 1 10 4 2 10 9 3 10 15 4 10 22 5 10 40 According to the table above, the marginal cost of producing the fifth unit is ,[object Object],[object Object],[object Object],[object Object],[object Object],According to the table below, the marginal cost of producing the fifth unit is

What will graph of Average Cost Curves look like? ,[object Object],[object Object],[object Object],[object Object]

Short Run Costs VC Q $ 50 VC increases slowly at first. Since VC is ↑ more slowly than q, AVC ↓. LaterVC increases faster than q and AVC ↑ .

Average Cost Curves AFC AVC Q $

Average Total Cost ,[object Object],[object Object],[object Object],[object Object],[object Object]

Average Cost Curves AFC AVC Q $ ATC AFC

Marginal Cost ,[object Object],[object Object],[object Object]

Labor Output 0 0 1 22 2 38 3 50 Over the range indicated, the production process in the table above exhibits ________ marginal product of labor, and the marginal cost curve for this firm would be ________. ,[object Object],[object Object],[object Object],[object Object],[object Object],Over the range indicated, the production process in the table below exhibits _________ marginal product of labor, and the marginal cost curve for this firm would be _________.

Answer ,[object Object],[object Object]

MC intersects AC at the minimum ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Average Cost Curves AVC Q $ ATC MC

When marginal cost is above average total cost, ,[object Object],[object Object],[object Object],[object Object]

Long Run Cost Curves ,[object Object],[object Object],[object Object],[object Object]

Returns to scale ,[object Object],[object Object],[object Object]

Average Total Cost in the Short and Long Runs

Long Run Costs ,[object Object]

The short run is a period of time less than three months long. ,[object Object],[object Object]

The long run average cost curve is U-shaped because the principle of diminishing returns. ,[object Object],[object Object]

Chapter 13

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Chapter 13