Upload
brittney-chavez
View
216
Download
0
Tags:
Embed Size (px)
Citation preview
The Costs of Production
Mr. Raposo
What is a business?
• Business: An enterprise that brings individuals, financial and economic resources to produce goods or
• services.• Sole Proprietorship: A business owned by a single
person.• Partnership: A business owned by two or more people.• Corporation: A company given legal status apart from its
owners. Ownership in a corporation is gained (loss) by buying (selling) shares.
What is Production?
• Production: The process of transforming our resources (inputs) into a good or service with economic value (output).
• Inputs: Resources used in production
• Output: The quantity of a good or service that results from production
Labour Intensive vs. Capital Intensive Processes
• Labour-intensive process: Employs more labour less capital in its production process
• Capital-intensive process: Employs more capital and less labour in its production process.
Example of Productive Efficiencyfig. 4.2
Process Workers (labour)
Sewing Machines (capital)
Total T-shirts Produced per
day
A 4 2 250
B 3 3 250Capital Intensive
Labour Intensive
Productive Efficiency
• Productive Efficiency: Producing a certain quantity of output at the lowest cost.
• Example: Worker in previous example costs $100/day. The cost of the machine is $25 day. Which production process is more efficient?
Exercise: Measure Productive Efficiency
Process Workers (labour)
$100/day
Sewing Machines (capital)
$25/day
Cost per day for labour
Cost per day for
machines
Total Cost
A 4 2
B 3 3
Answer: Measuring Productive Efficiency
Process Workers (labour)
$100/day
Sewing Machines (capital)
$25/day
Cost per day for labour
Cost per day for
machines
Total Cost
A 4 2 $400 $50 $450
B 3 3 $300 $75 $375
Economic Costs vs. Accounting Costs
• Economic Costs: Include both Explicit and Implicit costs
• Explicit Costs: Expenses such as payment for material, wages, rent, etc. These costs appear on a business firm's accounting records.
• Implicit Costs: These costs not included among expenses on the accounting records of a business firm. They are estimates of what the owner’s “give up” by being involved in the business.
Economic Profit
Economic Profit = Total revenue – economic costs
Remember,
Total Revenue (TR) = Price (P) x Quantity(Q)
Accounting Profit
• Excludes implicit costs
• Accounting Profit = Total revenue-Explicit
Costs
Example:• Widget company has total revenue of
$200,000. Accountants determine explicit costs to be $150,000. The owner, Mr. R, of widget co. has invested $80,000 of his own money that could earn 10% on $80,000 if invested. Mr. R could also be earning at least $45,000 as a manager at his previous work. Calculate accounting and economic profit.
Exercise
• Calculate Accounting and Economic Profit
Example:• Widget company has total revenue of
$200,000. Accountants determine explicit costs to be $150,000. The owner, Mr. R, of widget co. has invested $80,000 of his own money that could earn 10% on $80,000 if invested. Mr. R could also be earning at least $45,000 as a manager at his previous work. Calculate accounting and economic profit.
Accounting Profit
= Total Revenue – Explicit Costs
= $200,000 - $150,000
= $50,000
Economic Profit
= Total Revenue – Economic Costs
= Total Revenue – (Explicit + Implicit Costs)
= $200,000 – ($150,000+$8,000+$45,000)
= $200,000 – $203,000
= -$3,000 (a loss)
(Interest Calculated as: $80,000 x 10% = $8,000)
Homework: p. 121#1-5
Production in the Short-Run
• Short-run: A period of time too short for a business to alter its plant capacity, but long enough to vary the degree to which this capacity is utilized.
• Long-run: A period of time long enough to permit a firm to vary the capacity of the plant as well as the degree of its use.
Using Resources
• Fixed Inputs: Inputs that cannot be adjusted in the short run. (ex: Size of machine or factory)
• Variable Inputs: Inputs that can be adjusted in the short run. (ex: labour and materials)
Total, Average and Marginal Product
• Total product = q (quantity of output)
• Average product = total product (q)
(AP) # of workers (L)
• Marginal product = q L
Calculate and Graph
• Calculate and total, marginal and average product
• Graph total product on a separate graph
• Graph marginal and average product together on a separate graph below the total product graph
• Refer to text fig.4.4 p. 106
Fig. 4.3 Production in the Short RunLabour Total
ProductMarginal Product
Average Product
0 0
1 80
2 200
3 250
4 270
5 280
6 270
Fig. 4.3 Production in the Short Run
Labour Total Product
Marginal Product
Average Product
0 0 -
1 80 80 80
2 200 120 100
3 250 50 83.3
4 270 20 67.5
5 280 10 56
6 270 -10 45
The Costs of Production
• Fixed, Variable & Total Costs
• Per Unit Costs (or Average Costs)
• Marginal Costs
Law of Diminishing Marginal Returns
• Law of diminishing marginal returns: At a certain point, the addition of a variable input to a fixed input causes the marginal product to decrease.
Law of Diminishing Marginal Returns
• Example: Class activity for Mr. R’s widget co.
Short Run & Long Run
• Short Run- a period in which at least one of a firm’s resources is fixed (plant capacity)
• Output can be varied by increasing labour, materials & other resources but plant capacity is fixed
• Long Run- a period in which all resources are variable, including plant capacity
Fixed, Variable & Total Costs
• Fixed Costs = Costs that do not vary with output
• Variable Costs = Costs that vary with output
• Total Costs = Fixed + Variable Costs
Per Unit or Average Costs
• Average Fixed Costs (AFC) = TFC
Q
• Average Variable Costs (AVC) = TVC
Q
• Average Total Costs (ATC) = TFC+TVC
Q
Marginal Cost
• Marginal Cost (MC): the additional cost of producing one more unit of output.
• Marginal Cost = Change in Total CostChange in Q
Application
• Calculate and graph marginal cost, average cost, average variable costs and average fixed costs
• Refer to text p. 111
Short-run costs: Enter formula in first row
Labour Total Product
Marginal Product
Fixed Costs
Variable Costs
Total Costs
Change in Total Costs
Marginal Costs
Average Fixed Costs
Average Variable Costs
Average Cost
0 0
1 80
2 200
3 250
4 270
5 280