Transcript No Slide Title

Chapter 8
Costs of Production
7/21/2015
1
What is a Fixed Cost?
Cost to a firm that does
not vary with the quantity
of goods produced
2
What are examples of
Fixed Costs?
• rent or mortgage
• a part of utilities
3
Fixed Cost is also known
as…..
Sunk Cost
4
What is a Variable Cost?
Cost that varies with the
quantity of goods produced
5
What are examples of
Variable Costs?
• worker’s wages
• raw materials
• some utilities
• some taxes
6
What is
Labor Productivity?
The output per
laborer per
hour
7
Under what condition is
it cheaper to pay $10 an
hr. to a U.S. worker than
$1 an hour to a foreign
worker?
8
If the U.S. worker is more
than 10 times as productive
as the foreign worker
9
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
10
Why do non-labor,
variable costs per unit
of output increase as
output increases?
Resources become
more scarce
11
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
12
What is
Total Variable Cost?
The sum of specific
variable costs in the
firm’s cost structure
13
Total Variable Costs
$
Q
14
What are Total Costs?
Cost to the firm that
includes both fixed
and variable costs
15
Total Costs
$
TC
TVC
TFC
Q
16
What is
Average Total Cost?
Total cost divided
by the quantity of
goods produced
17
$
TVC
TC
10
ATC =
5/2 = 2.5 9
8
7
6
5
ATC =
4
6/5 = 1.2
3
2
6
5
1
0
1 2
3
4
5
6
7 8
9 10
Q
$
10
9
8
7
6
5
4
3
2
ATC
1
0
1 2
3
4
5
6
7 8
9 10
Q
19
What is
Average Variable Cost?
Total variable cost
divided by the
quantity of goods
produced
20
$
10
9
8
7
6
5
4
3
2
TVC
1
0
1 2
3
4
5
6
7 8
9 10
Q
21
$
10
9
8
7
6
5
4
3
2
ATC
AVC
1
0
1 2
3
4
5
6
7 8
9 10
Q
22
What is
Average Fixed Cost?
Total fixed cost divided
by the quantity of
goods produced
23
Costs
AFC
Quantity2
4
24
What is
Marginal Cost?
The change in total cost
incurred by adding one
more unit of output to
production
25
If the only thing we observe is a
change in total cost associated with a
small change in output produced then
MC is computed in the following way.
MC =
TC
Q
26
$
TC
10
MC =
3/3 = 1 9
8
7
6
5
4
3
2
3
3
1
0
1 2
3
4
5
6
7 8
9 10
Q
$
TC
10
9
8
7
6
5
4
3
2
1
0
1 2
3
4
5
6
7 8
9 10
Q
TC,
TVC,
TFC
TFC
0 Q1
Q2
Q3
Q
MC ATC
AVC
AFC
0
Q
29
Costs
MC
Avg. Fixed Costs
ATC
AVC
Quantity
30
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
31
$
10
9
8
7
6
5
4
3
2
MC
ATC
AVC
1
0
1 2
3
4
5
6
7 8
9 10
Q
32
$
10
9
8
7
6
5
4
3
2
MC
ATC
AVC
1
0
1 2
3
4
5
6
7 8
9 10
Q
33
What is the Short Run?
A time in which producers
can change some, but
not all of its resources
34
What is the Long Run?
The time in which
producers can change
quantity of all resources
35
Short-run Vs. Long-run Average Cost
$ per
unit of
Output
0
Q1
Q2
Q3
Q
36
What are
Economies of Scale?
When a firm increases
resources in the long run
and ATC decreases
37
What are
Diseconomies of Scale?
When a company
increases resources in
the long run and ATC
increases
38