Chapter+13+-+The+Costs+of+Production+CDJ

The Costs of Production

http://www.flickr.com/photos/inkyfingerz/454976773/ Part 1. What are costs ?

Goal of a firm is to maximize the profit. Then what is a profit?

Profit = Total Revenue - Total Cost

Here, the Total Revenue refers to the amount that the firms receive for selling the output. Also, the  Total Cost refers to the total amount that the firm pays to buy the inputs. For example, if the output refers to pizza, then the inputs for making such output (pizza) would be items such as flour, sugar, workers, etc.

When considering the costs as opportunity costs, there are two types of costs that you must consider: Explicit Costs & Implicit Costs

Explicit costs refers to the input costs that are easily identified and required by the firm, such as the wage expense. On the other hand, implicit costs refers to the input costs that are not easily accounted and not required by the firm, such as the time and effort that the owner puts into the company.

To see the __major difference__ between explicit costs and implicit costs, take a look at the picture below:

http://www.pmcl.com/nedprototype/Images/profit.gif

In this picture, we see how an economist views a firm and how an account views a firm. There are two major differences between how they view the firm.

1) They measure the **costs** differently 2) They measure the **profits** differently

1) For the economists, we see that they consider both the implicit costs and the explicit costs . However, as you can see for the accountants, they only take in consider of the explicit costs.

2) Furthermore, we see that **economists measure a firm's economic profit** where as **accountants measure the firm's accounting profit** . Here, the economic profit refers to the __total revenue minus all the opportunity costs__ -explicit and implicit and accountant profit refers to __only the firm's explicit costs subtracted from firm's total revenue.__

<span style="color: rgb(3, 2, 3);"><span style="font-size: 150%; color: rgb(204, 0, 255);">

<span style="color: rgb(3, 2, 3);"><span style="font-size: 150%; color: rgb(204, 0, 255);"> Production and Costs

http://www.math.wpi.edu/Course_Materials/Calc_Projects/img91.gif Now take a look at the video below:

media type="file" key="econ.mov" & Take in consider of the graphs that appear in the powerpoint :)

<span style="color: rgb(215, 38, 4); font-size: 140%;"> The Various Measures of Cost <span style="color: rgb(3, 2, 3);">As we learned what the total cost is, let's learn about it in detail.

The total cost can be divided into two types:<span style="font-size: 130%; color: rgb(165, 29, 29);"> fixed costs and variable costs

Fixed costs are the costs that <span style="font-size: 110%; color: rgb(206, 0, 255);">**does not change** as the output is produced, whereas variable costs are costs that <span style="font-size: 110%; color: rgb(113, 30, 30);">**does change** with the output that is being produced.

In addition, we can ask ourselves, a) How much does it cost to make a<span style="font-size: 140%; color: rgb(26, 132, 84);"> typical can of coke? b) How much does it cost to **increase the production** of coke by 1 can ?

The first a) question can be answered through the concept of : <span style="font-size: 120%; color: rgb(65, 7, 223);"> average total cost, average fixed cost, and average variable cost

<span style="font-size: 120%; color: rgb(54, 50, 98);">Average total cost is calculated by having the total cost divided by Q <span style="font-size: 130%; color: rgb(89, 31, 142);">Average fixed cost is calculated by dividng the Q from the fixed costs <span style="font-size: 130%; color: rgb(90, 38, 125);">Average variable cost is calculated by dividing Q from the variable costs

Thus, by using such calculation method, we could determine the cost of the typical unit of a can of coke.

On the other hand, b) question is answered in different way. To answer the question, we use the concept of the <span style="font-size: 130%; color: rgb(209, 26, 26);">marginal cost . This term describes as you increase the unit of production, there will be increase in total cost. Moreover, marginal cost can be calculated by: <span style="font-size: 130%; color: rgb(99, 97, 158);">change in total cost / change in quantity. picture: http://www.blackhawkcenter.org/images/money.jpg

<span style="font-size: 150%; font-family: 'Lucida Console',Monaco,monospace; color: rgb(255, 36, 169);">Cost Curves and Their Shapes <span style="color: rgb(3, 2, 3);"> Listen carefully to following concepts from the audio: 1) Rising Marginal Cost 2) U-Shaped Average Total Cost 3) The Relationship between Marginal Cost and Average Total Cost

AND use the graph below to understand clearly !

media type="file" key="econ1 2.m4a"

http://www.bized.co.uk/glossary/big/all_costs.gif <span style="font-size: 140%; color: rgb(32, 16, 168);"> Summary o<span style="font-size: 140%; color: rgb(32, 16, 168);"> f the following shapes:
 * As the quantity of output increases, it will cause the marginal cost to eventually rise as well
 * The shape of the average-total-cost curve is U-shaped
 * Marginal-cost curve and the average-total cost curve intersects at the minimum of ATC

<span style="font-size: 150%; color: rgb(245, 15, 15);">In the Long-Run Average-Total-Cost curve ... <span style="font-size: 140%; color: rgb(32, 16, 168);"> [|http://www.cbpa.ewu.edu/~pnemetzmills/OMch9/fig11_2.gif] For the long-run ATC, you must consider the following<span style="font-size: 120%; color: rgb(235, 76, 76);"> three terms: <span style="font-size: 140%; color: rgb(32, 16, 168);"> For the first one, economies of scale refers to the <span style="font-size: 110%; color: rgb(22, 65, 172);">**falling of long-run ATC** as the quantity increases. Second one refers to the<span style="font-size: 110%; color: rgb(31, 25, 163);"> **rising of long-run ATC** as Q increases, and the last one refers to the <span style="font-size: 110%; color: rgb(27, 17, 187);">**constant long-run ATC** even as Q changes.
 * 1) **<span style="font-size: 130%; color: rgb(233, 37, 197);">Economies of scale **
 * 2) **<span style="font-size: 130%; color: rgb(239, 82, 189);">Diseconomies of scale **
 * 3) **<span style="font-size: 130%; color: rgb(237, 69, 207);">Constant returns to scale **

<span style="font-size: 150%; color: rgb(198, 205, 14);">Conclusion
 * Profit = Total Revenue - Total Cost
 * Economic profit considers both explicit and implicit cost where as accountant profit considers only the explicit cost
 * Production function is illustrated with the diminishing marginal product, and its shape of the curve is opposite from the total cost curve that rises
 * ATC has a U-shaped curve due to the combination of fixed and variable costs
 * When marginal cost is less than ATC, ATC is falling; when marginal cost is greater than ATC, ATC is rising
 * Three different terms in the long-run ATC curve: economies of scale, diseconomies of scale, constant returns to scale

<span style="font-size: 150%; color: rgb(241, 136, 75);">Questions and Answers <span style="font-size: 130%; color: rgb(160, 32, 167);">
 * 1. Which curve crosses the average-total-cost curve at its minimum? WHY?**

A1. The marginal-cost curve crosses the average-total-cost curve at its minimum. This is because beyond or below this point will either have the average total cost to rise or fall. In other words, when marginal cost is less than the ATC, ATC will be falling, and when marginal cost is greater than ATC, ATC will be rising. However, at the point of intersection, it will be the minimum of those rising and falling of the Average Total Cost curve.


 * <span style="font-size: 130%; color: rgb(172, 21, 21);">2. What is the shape of the production function and why? **

2A. The shpae of the production function curve is a flattening curve. This is due to the "diminishing marginal product". As more and more workers are being employed, it lesses the contribution of the workers for producing the goods such as cakes. Because production of the cakes becomes less, the arginal proudct declines, making the production function to become flatter.

<span style="font-size: 140%; color: rgb(32, 16, 168);">

<span style="font-size: 140%; color: rgb(32, 16, 168);">