Embed Size (px)
DESCRIPTION
Chapter 8. Costs of Production. 10/9/2014. What is a Fixed Cost?. Cost to a firm that does not vary with the quantity of goods produced. What are examples of Fixed Costs?. rent or mortgage a part of utilities. Fixed Cost is also known as…. Sunk Cost. What is a Variable Cost?. - PowerPoint PPT Presentation
Citation preview
1
Chapter 8Chapter 8Chapter 8Chapter 8
Costs of ProductionCosts of Production
04/20/23
2
What is a Fixed Cost?What is a Fixed Cost?
Cost to a firm that does not vary with the quantity of goods produced
3
What are examples of Fixed Costs?
What are examples of Fixed Costs?
• rent or mortgage• a part of utilities
4
Fixed Cost is also known as…..
Fixed Cost is also known as…..
Sunk Cost
5
What is a Variable Cost?What is a Variable Cost?Cost that varies with the
quantity of goods produced
6
What are examples of Variable Costs?
What are examples of Variable Costs?
• worker’s wages• raw materials• some utilities• some taxes
7
What isLabor Productivity?
What isLabor Productivity?
The output per laborer per hour
8
Under what condition is it cheaper to pay $10 an hr. to a U.S. worker than $1 an hour to a foreign
worker?
Under what condition is it cheaper to pay $10 an hr. to a U.S. worker than $1 an hour to a foreign
worker?
9
If the U.S. worker is more than 10 times as productive as the foreign worker
10
Why do labor costs per unit of output
changes as more units of labor are hired?
Why do labor costs per unit of output
changes as more units of labor are hired?
Price of labor increases Quality of labor decreases Labor productivity Changes
11
Why do non-labor, variable costs per unit of output increase as
output increases?
Why do non-labor, variable costs per unit of output increase as
output increases?
Resources become more scarce
12
Does the cost of all resources increase more
than production increases?
Does the cost of all resources increase more
than production increases?
No, the costs of some resources may vary proportionately with the level of production
13
What isTotal Variable Cost?
What isTotal Variable Cost?
The sum of specific variable costs in the firm’s cost structure
14
Total Variable Costs
$
Q
15
What are Total Costs?What are Total Costs?
Cost to the firm that includes both fixed and variable costs
16
Total Costs
$
Q
TFC
TC
TVC
17
What isAverage Total Cost?
What isAverage Total Cost?
Total cost divided by the quantity of goods produced
1 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6
5
ATC =
5/2 = 2.5
ATC =
6/5 = 1.2
TC
6
Q
$
0
TVC
191 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6ATC
Q
$
0
20
What isAverage Variable Cost?
What isAverage Variable Cost?
Total variable cost divided by the quantity of goods produced
211 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6
TVC
Q
$
0
221 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6ATC
AVC
Q
$
0
23
What isAverage Fixed Cost?
What isAverage Fixed Cost?
Total fixed cost divided by the quantity of goods produced
24
Quantity
AFC
24
Cos
ts
25
What isMarginal Cost?
What isMarginal Cost?
The change in total costThe change in total cost incurred by adding oneone more unit of outputmore unit of output to production
26
MC = Q
TC
If the only thing we observe is a If the only thing we observe is a change in total cost associated with a change in total cost associated with a small change in output produced then small change in output produced then MC is computed in the following way.MC is computed in the following way.
1 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6
MC =
3/3 = 1
TC
3
3
Q
$
0
1 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6
TC
Q
$
0
29
TC,
TVC,
TFC
TFC
Q
Q
Q2 Q3
ATCMC
AVC
AFC0
0 Q1
30
Cos
ts
Quantity
ATC
AVC
MC
Avg. Fixed Costs
31
Why does MC = ATC at minimum ATC?
Why does MC = ATC at minimum ATC?
If the marginal is above the average, the average increases
If the marginal is below the average, the average decreases
321 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6
MC
ATC
AVC
Q
$
0
331 2 3 4 5 6 7 8 9 10
1
2
3
4
5
7
89
10
6
MCATC
AVC
Q
$
0
34
What is the Short Run?What is the Short Run?
A time in which producers can change some, but not all of its resources
35
What is the Long Run?What is the Long Run?The time in which
producers can change quantity of all resources
36
Short-run Vs. Long-run Average CostShort-run Vs. Long-run Average CostShort-run Vs. Long-run Average CostShort-run Vs. Long-run Average Cost
Q
$ per unit of Output
SRA
C ASR
AC B
SRA
CC
SRA
CD
Q1Q2 Q30
LRAC
37
What areEconomies of Scale?
What areEconomies of Scale?
When a firm increases resources in the long run and ATC decreases
38
What areDiseconomies of Scale?
What areDiseconomies of Scale?
When a company increases resources in the long run and ATC increases
