Transcript Cost

Chapter 8:
Impacts of Output
Decisions on ShortRun Costs, Revenues,
and Profits for
Competitive Firms
Key Topics
1.
Cost concepts
a.
b.
c.
d.
e.
2.
Revenue concepts
a.
b.
3.
Cash and Non Cash
Variable and Fixed
Total: TFC, TVC, TC
Average: AFC, AVC, ATC, AVC & AP
Marginal: MC, MC & MP
Total
Marginal
Profit concepts
a.
b.
Profit maximizing output
Firm & market supply
Profit Overview (recall)
= TR – TC
 TR depends on P of output, Q of
output
 TC depends on P of inputs, Q of
inputs, productivity of inputs,
production technology used
 Profit
Recent Examples of Firm ‘Cost’
Concerns
GM
1.
Spent $5 billion to  costs of producing Saturn cars
Labor costs per car for GM were 2x Toyota’s
-
United, Delta, & other airlines
2.
-
Southwest’s costs often 50% less
Sears, K-Mart, Target
3.
-
Trying to compete with Walmart on basis of costs
Georgia Pacific
4.
-
Started using ‘thinner’ saws
Less saw dust
800 more rail cars of lumber per year
Cost Concepts (see Table 8.5)
 Cash
and Non Cash
 Fixed and Variable
 Total, Average, and Marginal
Opportunity Cost Examples
Activity
Opportunity Cost
Operate own business
Lost wages and
interest
Own and farm land
Lost rent and interest
Buy and operate
equipment
Lost interest and rent
Total Fixed vs. Total Variable Costs
TFC
TVC
TC
=
=
=
=
=
=
=
=
=
total fixed costs
costs that have to be paid even if output = 0
costs that do NOT vary with changes in
output
‘overhead’ and ‘sunk’ costs
total variable costs
costs that DO vary with changes in output
0 if output = 0
total costs
TFC + TVC
Average Costs
AFC =
=
AVC =
=
ATC =
=
fixed costs per unit of output
TFC/q
variable costs per unit of output
TVC/q
total costs per unit of output
TC/q = AFC + AVC
Marginal Cost
MC =
additional cost per unit of
additional output
=
 TC  TVC

q
q
=
slope of TC and slope of TVC
curves
Cost Tables
 See
8.1,
8.2,
8.3,
8.4
Cost Curve Graphs
TFC, AFC
TVC, AVC
TC, ATC
MC
(see Figs. 8.2 thru 8.8)
Product and Cost Relationships
Assume variable input = labor
 MP = ΔQ/ΔL
 TVC = W ∙ L
W
 MC =  TVC W   L
Q

Q

MP
note: MC Δ is opposite of MP Δ

AVC =
TVC W  L W


Q
Q
AP
note: AVC Δ is opposite of AP Δ
MC, AVC, and ATC Relationships
If MC > AVC  AVC is increasing
If MC < AVC  AVC is declining
If MC > ATC  ATC is increasing
If MC < ATC  ATC is declining
Total Revenue (TR) and Marginal
Revenue (MR)

Total revenue (TR) is the total amount that a
firm takes in from the sale of its output.
TR = P x q


Marginal revenue (MR) is the additional
revenue that a firm takes in when it increases
output by one additional unit.
In perfect competition, P = MR.
Comparing Costs and Revenues to
Maximize Profit



The profit-maximizing level of output for all
firms is the output level where MR = MC.
In perfect competition, MR = P, therefore, the
firm will produce up to the point where the
price of its output is just equal to short-run
marginal cost.
The key idea here is that firms will produce
as long as marginal revenue exceeds
marginal cost.
Profit Max
 Table
(8.6)
 MR = MC graph (Fig. 8.10)
 TR, TC graph?
Q.
True or False?
Fixed costs do not affect the profitmaximizing level of output?
A.
True.
Only, marginal costs (changes in variable
costs) determine profit-maximizing level of
output. Recall, profit-max output rule is to
produce where MR = MC.
Firm & Market Supply
Firm S
=
Market S =
See Fig. 8.11
MC curve above AVC
sum of individual firm
supplies
Q. Should a firm ‘shut down’ in SR?
A.
Profit if ‘produce’
= TR – TVC – TFC
Profit if ‘don’t produce’ or ‘shut down’
= -TFC
 Shut down if
 TR – TVC – TFC < -TFC
 TR – TVC < 0
 TR < TVC