1、The Costs of Production,1,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Key Concepts on the P
2、roducer,Total revenueAmount a firm receives for the sale of its outputTotal costMarket value of the inputs a firm uses in productionProfitTotal revenue minus total cost,2,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted
3、 in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,What are Costs?,Costs as opportunity costsThe cost of something is what you give up to get itFirms cost of productionInclude all the opportunity costs of producing its output o
4、f goods or servicesExplicit costsImplicit costs,3,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom us
5、e.,What are Costs?,Explicit costsInput costs that require an outlay of money by the firmImplicit costsInput costs that do not require an outlay of money by the firmIgnored by accountantsTotal costs=Explicit costs+Implicit costs,4,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or
6、 duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,What are Costs?,The cost of capital as an opportunity costKey example of Implicit cost:Opportunity cost of financial
7、capital invested in the businessInterest income not earned on financial capitalSaving vs.Invested in businessNot shown as cost by an accountant,5,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed
8、 with a certain product or service or otherwise on a password-protected website for classroom use.,What are Costs?,Economic profitTotal revenue minus total costTotal costs includes both explicit and implicit costsAccounting profitTotal revenue minus total explicit cost,6,2012 Cengage Learning.All Ri
9、ghts Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Figure 1,7,2012 Cengage Learning.All Rights Reserved.May not be copied,scan
10、ned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Economists versus Accountants,Economists include all opportunity costs when analyzing a firm,whereas accountant
11、s measure only explicit costs.Therefore,economic profit is smaller than accounting profit.,Production and Costs,Production functionRelationship between quantity of inputs used to make a good and the quantity of output of that goodMarginal productIncrease in output that arises from an additional unit
12、 of an input(assume other inputs are fixed)Captured by the slope of the production functionDiminishing marginal productMarginal product of an input declines as the quantity of the input increasesAs production rises,production function gets flatter,8,2012 Cengage Learning.All Rights Reserved.May not
13、be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Table 1,9,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in wh
14、ole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,A Production Function and Total Cost:Carolines Cookie Factory,Production and Costs,Total-cost curveRelationship between quantity produ
15、ced and total costsGets steeper as the quantity produced risesResults from the diminishing marginal productTotal-cost curve and production function curve has close relations each otherAlso,marginal cost and marginal product have close relations each other,10,2012 Cengage Learning.All Rights Reserved
16、.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Figure 2,11,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or dupli
17、cated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,(a)Production function,The production function in panel(a)shows the relationship between the number of workers hired and th
18、e quantity of output produced.Here the number of workers hired(on the horizontal axis)is from the first column in Table 1,and the quantity of output produced(on the vertical axis)is from the second column.The production function gets flatter as the number of workers increases,which reflects diminish
19、ing marginal product.The total-cost curve in panel(b)shows the relationship between the quantity of output produced and total cost of production.Here the quantity of output produced(on the horizontal axis)is from the second column in Table 1,and the total cost(on the vertical axis)is from the sixth
20、column.The total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product.,(b)Total-cost curve,Productionfunction,Total-cost curve,Carolines Production Function and Total-Cost Curve,Various Measures of Cost,Fixed costsCosts that do not vary with the quantit
21、y of output producedVariable costsCosts that vary with the quantity of output producedTotal costFixed cost+Variable cost,12,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain produc
22、t or service or otherwise on a password-protected website for classroom use.,Various Measures of Cost,Average fixed cost(AFC)Fixed cost divided by the quantity of outputAverage variable cost(AVC)Variable cost divided by the quantity of output,13,2012 Cengage Learning.All Rights Reserved.May not be c
23、opied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Table 2,14,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole
24、 or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,The Various Measures of Cost:Conrads Coffee Shop,Figure 3,15,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or dupli
25、cated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Conrads Total-Cost Curve,Here the quantity of output produced(on the horizontal axis)is from the first column in Table 2,an
26、d the total cost(on the vertical axis)is from the second column.As in Figure 2,the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product.,Total-cost curve,Various Measures of Cost,Average total cost(ATC)Total cost divided by the quantity of outputA
27、verage total cost=Total cost/QuantityATC=TC/QCost of a typical unit of outputTotal cost is divided evenly over all the units produced,16,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a c
28、ertain product or service or otherwise on a password-protected website for classroom use.,Various Measures of Cost,Marginal cost(MC)Increase in total cost arising from an extra unit of productionMarginal cost=Change in total cost/Change in quantityMC=TC/QIncrease in total costFrom producing an addit
29、ional unit of output,17,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Various Measures of Cos
30、t,Rising marginal cost curveDue to diminishing marginal productU-shaped average total cost curveATC=AVC+AFCAFC always declines as output risesAVC typically rises as output increases Reflect diminishing marginal productThe bottom of the U-shapeAt quantity that minimizes ATC:Efficient scale,18,2012 Ce
31、ngage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Various Measures of Cost,Relationship between MC and A
32、TC When MC ATC:average total cost is risingThe marginal-cost curve crosses the average-total-cost curve at its minimum,19,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product
33、or service or otherwise on a password-protected website for classroom use.,Figure 4,20,2012 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Conrads Average-Cost and Marginal-Cost Curves,This figure sh
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