Chapter+13+The+Costs+of+Production.JAKS

=Chapter 13. = =The Costs of Production = = =



 Definitions
 -Total Revenue: amount paid by buyers and received by sellers (P x Q) -Total Cost: value of all the firm's inputs -Profit: total revenue - total cost -Explicit Cost: input costs that require an outlay of money -Implicit Cost: input costs that do not require an outlay of money; opportunity cost -Economic Profit: total revenue - (Explicit cost + Implicit cost) -Accounting Profit: total revenue - Explicit cost -Production Function: the relationship between quantity of input and output -Marginal Product: increase in output due an additional unit of input = ∆TR / ∆Q -Diminishing Marginal Product: marginal product decreases as the input increases -Fixed Costs: costs that do not vary with the quantity of output -Variable Costs: costs that vary with the quantity of output -Average Total Cost = TC / Q -Average Fixed Cost = FC / Q -Average Variable Cost = VC / Q -Marginal Cost : increase in total cost due to an extra unit of production, = ∆TC / ∆Q -Efficient Scale: lowest point of ATC -Economies of Scale: Long run ATC falls as the quantity of output increases -Diseconomies of Scale: Long run ATC rises as the quantity of output increases -Constant Returns to Scale: Long run ATC stays the same as the quantity of output increases
 * 

 Learning Objectives
1. What are the different types of Costs of Production? 2. What is the goal of all firms? 3. How are these different in the short run and in the long run?


 *  Introduction**

The goal of a firm is to maximize profit Profit = Total revenue – Total cost

To see how a firm tries to maximize profit, we must determine how to measure its total revenue and its total cost. -Total revenue:the quantity the firm produces times the price at which it sells its output (P x Q)

There are 2 different types of costs: explicit and implicit -explicit costs require the firm to pay -implicit costs do not require the firm to pay

Total cost = explicit costs + implicit costs

Accountants measure the explicit costs to measure the flow of money in and out of a firm. Economists study both explicit and implicit costs, to study how a firm makes production and pricing decisions.

In this example of a production function, as quantity of input increases, the output's increase gets smaller and smaller. This happens because of the diminishing marginal product. At first, when input increases, the output increases significantly because of specialization. However, as input gets higher and higher, the output increases in less amounts.
 * Diminishing Marginal Product**

For example, in a bakery, two people can work way faster than one person can because they can specialize; one person can make the dough while the other bakes. The output will continue to increase until there are too many workers for everyone to have a job. The oven will be crowded and not everyone will have space to make the dough. Because of this diminishing marginal product, the increase in output slows down.

media type="youtube" key="M7rA4VfvdAw" height="344" width="425" • Marginal Cost decreases and then increases. It declines at first because when the output is small, there are less inputs. The marginal product of an additional input is large while the marginal cost of an additional input is small. When the quantity of output increases enough, more input is required and therefore, the marginal cost increases. • Average Fixed Cost slopes downward because the fixed cost is always the same. If input increases, there is a lower cost per input. • Average Variable Cost increases as the quantity of output increases • Average Total Cost is:
 * 1) -U-shaped
 * 2) -the marginal cost intersects ATC at efficient scale
 * 3) -when MC is less than ATC, ATC declines and when MC is greater than ATC, ATC rises
 * 4) -occurs because
 * 5) -if the cost of an additional unit is less than the current average cost, ATC will fall
 * 6) -if the cost of an additional unit is greater than the current average cost, ATC will rise

Fixed costs are variable in the long run and therefore, the ATC curve in the short run differs from that in the long run.
 * Short Run and Long Run Average Total Cost**


 * Economies and Diseconomies of Scale**

Economies of Scale -ATC in short run with small factory -ATC in short run with medium factory

Constant Returns to Scale -ATC in short run with medium factory -ATC in short run with large factory

Diseconomies of Scale -ATC in short run with large factory -ATC stays the same as the quantity of output changes

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=**THANK YOU **=

**Review Questions **
   The cost of producing an additional unit of output is the firms  Average total cost is increasing whenever  I the short run, a firm incurs fixed costs <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> When a firm is able to put idle equipment to use by hiring another worker <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Answers13.jaks
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">marginal cost
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">productivity offset
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">variable cost
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">average variable cost
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">total cost is increasing marginal cost is increasing
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">marginal cost is less than average total cost
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">marginal cost is greater than average total cost
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">only if it incurs variable costs
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">only if it produces no output
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">only if it produces a positive quantity of output
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">if it produces no output or it it produces a positive quantity of output
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">variable costs will rise
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">variable costs will fall
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">fixed costs will fall
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">fixed costs and variable costs will rise

**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Work Cited **
image: http://www.cartoonstock.com/lowres/jmo1901l.jpg image: http://darmano.typepad.com/logic_emotion/images/production.gif image: http://courses.cit.cornell.edu/econ101-dl/images/l16fig3r.gif image: http://johnleanomics.files.wordpress.com/2009/04/image2.png video: http://www.youtube.com/watch?v=M7rA4VfvdAw questions: mrski