Chapter+13+(The+Costs+of+Production)

The Cost of Production

A firms costs are a key determinant of its production and pricing decisions.

Total Revenue, Total Cost, and Profit.

Lets look at the equation: Profit = Total Revenue - Total cost.

So what does this mean? Total revenue is what the firm recieves from its good. (the total money) Total cost is what the firm has tp pay to keep manufacturing the good. (the cost)

In "Cost" there are two types: Explicit costs : are input costs that require an outlay of money by the firm Implicit costs : are input costs that do not require an outlay of money by the firm. Examples of implicit costs are the time spent and the money that may have been spent with something else. Examples of explicit costs are the actual money or physical input. Values to economist, and accountant are different when deciding about the profit of the firm.

 As the diagram shows above, the economist profit excludes EXPLICT, and IMPLICIT. Whereas, the accounting profit excludes only the EXPLICT costs.

Marginal product: the increase in output that arises from an additional unit of input. Production function: the relation ship between quantity of inputs used to make a good and the quantity of output of that good.

Marginal product and diminishing marginal returns are closely related! Make sure you know the term!



This is a diagram of the production function decreasing its quantity!

So why do these curves start to have a less steaper slope???

That is because of the **diminishing marginal product** ! So what is Diminshing marginal product?

You should know, because it is the core of economics!

media type="youtube" key="yVGSmP_EZHU" height="344" width="425" Diminishing marginal product/returns is the property whereby the marginal pproduct of an input declines as the quantity of the input increases.

If there is limited space to work in, with more than the workers needed, it is going to affect the production level. If the workers cannot even move, how can they work? the limited space and equipment - fixed costs - are the core of diminishing marginal returns. That is why on the long-run, there is no fixed cost, but only variable cost. In the long run, you may chose to buy anything or won't. Remember, the diminishing marginal returns/product only affect the short-run! So I talked about fixed and variable costs... BUT what are they?

Fixed costs: are costs that do not vary with the quantity of output produced. Variable costs: are costs that do vary with the quantity of output produced.

The examples of Fixed costs are usually the land, how big the firm/work place is, the technology involved.... The examples of Variable costs are usually the workers, the small objects that are inputs....

So if we have all of these costs... there must be the total costs of all of these!?

Well, fortunately, there are! View the diagram below as you read the definitions!

Average fixed cost (AFC) : fixed costs divided by the quantity of output Average total cost (ATC) : total cost divided by the quantity of output Average variable cost (AVC) : variable costs divided by the quantity of output Marginal cost (MC) : the increase in total cost that arises from an extra unit of production Efficient scale: the quantity of output that minimizes average total cost. Remember: // - Whenever the marginal cost is less than average total cost, average total cost is falling! - Whenever the marginal cost is greater than average total cost, average total cost is rising! //  The marginal-cost curve crosses the average total cost curve at its minimum ! why????? At low levels of output, marginal cost is below average total cost, so average total cost is falling. Lets talk more about the long run and short run!

Economies of scale: the property whereby long-run average total cost falls as the quantity of output increases. <span style="color: rgb(80, 209, 10);">Diseconomies of scale: the property whereby long-run average total cost rises as the quantity of output increases. <span style="color: rgb(191, 13, 45);">Constant returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes.

Remember: A firm's costs often depend on the time horizon considered. In particular, many costs are fixed in the short run but variable in the long run. As a result, when the firm changes its level of prouction, average total cost may rise more in the short run than in the long run.

Questions:

Which of the following would be a good example of an implicit cost incurred by Korean Airways?

a. The salaries paid to the pilots. b. The jet fuel bills. c. The rent that could be earned on an aircraft that is owned and used by Superior.

Answer: C

The property of diminishing marginal product of labor states that:

a. every additional worker hired contributes to diminish the quantity produced by the firm. b. every additional worker hired contributes to diminish the total costs of the firm. c. every additional worker hired contributes a smaller increase in production than previously hired workers.

Answer: C

Based on the table, if the Fixed Cost is $500, what is the Marginal Cost of the 10th unit?

a. $250 b. $300 c. $50 d. $200

Answer: B

Sources: http://www.culturaleconomics.atfreeweb.com/111%20114%20MBB%20Macro%20Graphics/Micro/Fig%207.1%20Econ%20Profit.jpg [|http://209.85.173.132/search?q=cache:ufabexT8uF4J:myweb.liu.edu/~uroy/PPT0/micro/costs_production.ppt+total+cost+curve+and+production+function&hl=ko&ct=clnk&cd=30&gl=kr] http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=9780324319163&discipline_number=413 http://upload.wikimedia.org/wikipedia/en/0/02/Shifting_production_function_small.png http://www.bized.co.uk/glossary/big/all_costs.gif http://economicobjectorvism.files.wordpress.com/2007/07/lratc.jpg Textbook: Principles of Microeconomics by N. Gregory Mankiw