1、,The Costs of Production,Chapter 13,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to:Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,The Costs of Production,T
2、he Law of Supply:Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.This results in a supply curve that slopes upward.,The Firms Objective,Maximum Profits,The economic goal of the firm is to maximize profits.,A Firms Total Revenue and Total Cost,Tot
3、al RevenueThe amount that the firm receives for the sale of its output.Total CostThe amount that the firm pays to buy inputs.,A Firms Profit,Profit is the firms total revenue minus its total cost.Profit = Total revenue - Total cost,Costs as Opportunity Costs,A firms cost of production includes all t
4、he opportunity costs of making its output of goods and services.,Explicit and Implicit Costs,A firms cost of production include explicit costs and implicit costs.Explicit costs involve a direct money outlay for factors of production. Implicit costs do not involve a direct money outlay.,Economic Prof
5、it versus Accounting Profit,Economists measure a firms economic profit as total revenue minus all the opportunity costs (explicit and implicit).Accountants measure the accounting profit as the firms total revenue minus only the firms explicit costs. In other words, they ignore the implicit costs.,Ec
6、onomic Profit versus Accounting Profit,When total revenue exceeds both explicit and implicit costs, the firm earns economic profit.Economic profit is smaller than accounting profit.,Economic Profit versus Accounting Profit,A Production Function and Total Cost,The Production Function,The production f
7、unction shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.,Marginal Product,The marginal product of any input in the production process is the increase in the quantity of output obtained from an additional unit of that input.,Marginal Produ
8、ct,Diminishing Marginal Product,Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the fir
9、m has a limited amount of equipment.,A Production Function.,Quantity of,Output,(cookies,per hour),150,140,130,120,110,100,90,80,70,60,50,40,30,20,10,Number of Workers Hired,0,1,2,3,4,5,Production function,Diminishing Marginal Product,The slope of the production function measures the marginal product
10、 of an input, such as a worker.When the marginal product declines, the production function becomes flatter.,From the Production Function to the Total-Cost Curve,The relationship between the quantity a firm can produce and its costs determines pricing decisions.The total-cost curve shows this relatio
11、nship graphically.,A Production Function and Total Cost,Hungry Helens Cookie Factory,Total-Cost Curve.,Total,Cost,$80,70,60,50,40,30,20,10,Quantity of Output,(cookies per hour),0,20,40,140,120,100,80,60,Total-cost,curve,The Various Measures of Cost,Costs of production may be divided into fixed costs
12、 and variable costs.,Fixed and Variable Costs,Fixed costs are those costs that do not vary with the quantity of output produced.Variable costs are those costs that do change as the firm alters the quantity of output produced.,Family of Total Costs,Total Fixed Costs (TFC)Total Variable Costs (TVC)Tot
13、al Costs (TC) TC = TFC + TVC,Family of Total Costs,Quantity,Total Cost,Fixed Cost,Variable Cost,0,$ 3.00,$3.00,$ 0.00,1,3.30,3.00,0.30,2,3.80,3.00,0.80,3,4.50,3.00,1.50,4,5.40,3.00,2.40,5,6.50,3.00,3.50,6,7.80,3.00,4.80,7,9.30,3.00,6.30,8,11.00,3.00,8.00,9,12.90,3.00,9.90,10,15.00,3.00,12.00,Average
14、 Costs,Average costs can be determined by dividing the firms costs by the quantity of output produced. The average cost is the cost of each typical unit of product.,Family of Average Costs,Average Fixed Costs (AFC)Average Variable Costs (AVC)Average Total Costs (ATC)ATC = AFC + AVC,Family of Average
15、 Costs,$3.00,Family of Average Costs,Quantity,AFC,AVC,ATC,0,1,$0.30,$3.30,2,1.50,0.40,1.90,3,1.00,0.50,1.50,4,0.75,0.60,1.35,5,0.60,0.70,1.30,6,0.50,0.80,1.30,7,0.43,0.90,1.33,8,0.38,1.00,1.38,9,0.33,1.10,1.43,10,0.30,1.20,1.50,Marginal Cost,Marginal cost (MC) measures the amount total cost rises wh
16、en the firm increases production by one unit.Marginal cost helps answer the following question:How much does it cost to produce an additional unit of output?,Marginal Cost,Marginal Cost,Total-Cost Curve.,$0.00,$2.00,$4.00,$6.00,$8.00,$10.00,$12.00,$14.00,$16.00,0,2,4,6,8,10,12,Quantity of Output,(gl
17、asses of lemonade per hour),Total Cost,Total-cost curve,Average-Cost and Marginal-Cost Curves.,$0.00,$0.50,$1.00,$1.50,$2.00,$2.50,$3.00,$3.50,0,2,4,6,8,10,12,Quantity of Output,(glasses of lemonade per hour),Costs,Cost Curves and Their Shapes,Marginal cost rises with the amount of output produced.T
18、his reflects the property of diminishing marginal product.,Cost Curves and Their Shapes,$0.00,$0.50,$1.00,$1.50,$2.00,$2.50,0,2,4,6,8,10,12,Quantity of Output,(glasses of lemonade per hour),Costs,Cost Curves and Their Shapes,The average total-cost curve is U-shaped.At very low levels of output avera
19、ge total cost is high because fixed cost is spread over only a few units.Average total cost declines as output increases.Average total cost starts rising because average variable cost rises substantially.,Cost Curves and Their Shapes,The bottom of the U-shape occurs at the quantity that minimizes av
20、erage total cost. This quantity is sometimes called the efficient scale of the firm.,Cost Curves and Their Shapes,$0.00,$0.50,$1.00,$1.50,$2.00,$2.50,$3.00,$3.50,0,2,4,6,8,10,12,Quantity of Output,(glasses of lemonade per hour),Total Costs,Relationship Between Marginal Cost and Average Total Cost,Wh
21、enever marginal cost is less than average total cost, average total cost is falling.Whenever marginal cost is greater than average total cost, average total cost is rising.,Relationship Between Marginal Cost and Average Total Cost,The marginal-cost curve crosses the average-total-cost curve at the e
22、fficient scale. Efficient scale is the quantity that minimizes average total cost.,Relationship Between Marginal Cost and Average Total Cost,$0.00,$0.50,$1.00,$1.50,$2.00,$2.50,$3.00,$3.50,0,2,4,6,8,10,12,Quantity of Output,(glasses of lemonade per hour),Costs,The Various Measures of Cost,It is now
23、time to examine the relationships that exist between the different measures of cost.,The Various Measures of Cost Big Bobs Bagel Bin,Big Bobs Cost Curves.,$0.00,$2.00,$4.00,$6.00,$8.00,$10.00,$12.00,$14.00,$16.00,$18.00,$20.00,0,2,4,6,8,10,12,14,16,Quantity of Output,(bagels per hour),Total Cost,Tot
24、al Cost Curve,Big Bobs Cost Curves.,0,0.5,1,1.5,2,2.5,3,3.5,0,2,4,6,8,10,12,14,16,Costs,Three Important Properties of Cost Curves,Marginal cost eventually rises with the quantity of output.The average-total-cost curve is U-shaped.The marginal-cost curve crosses the average-total-cost curve at the mi
25、nimum of average total cost.,Costs in the Long Run,For many firms, the division of total costs between fixed and variable costs depends on the time horizon being considered.In the short run some costs are fixed.In the long run fixed costs become variable costs.,Costs in the Long Run,Because many cos
26、ts are fixed in the short run but variable in the long run, a firms long-run cost curves differ from its short-run cost curves.,Average Total Cost in the Short and Long Runs.,Quantity of,Cars per Day,0,Average,Total,Cost,Economies and Diseconomies of Scale,Economies of scale occur when long-run aver
27、age total cost declines as output increases.Diseconomies of scale occur when long-run average total cost rises as output increases.Constant returns to scale occur when long-run average total cost does not vary as output increases.,Economies and Diseconomies of Scale,Quantity of,Cars per Day,0,Averag
28、e,Total,Cost,Summary,The goal of firms is to maximize profit, which equals total revenue minus total cost. When analyzing a firms behavior, it is important to include all the opportunity costs of production.Some opportunity costs are explicit while other opportunity costs are implicit.,Summary,A fir
29、ms costs reflect its production process.A typical firms production function gets flatter as the quantity of input increases, displaying the property of diminishing marginal product.A firms total costs are divided between fixed and variable costs. Fixed costs dont vary with quantities produced; varia
30、ble costs do.,Summary,Average total cost is total cost divided by the quantity of output.Marginal cost is the amount by which total cost would rise if output were increased by one unit.The marginal cost always rises with the quantity of output.,Summary,The average-total-cost curve is U-shaped.The ma
31、rginal-cost curve always crosses the average-total-cost curve at the minimum of ATC.A firms costs often depend on the time horizon being considered.,Economic Profit versus Accounting Profit,A Production Function.,Total-Cost Curve.,Total-Cost Curve.,Average-Cost and Marginal-Cost Curves.,Cost Curves and Their Shapes,Cost Curves and Their Shapes,Relationship Between Marginal Cost and Average Total Cost,Big Bobs Cost Curves.,Big Bobs Cost Curves.,Average Total Cost in the Short and Long Runs.,Economies and Diseconomies of Scale,
