Production and Costs: Topic 2

If a bakery can produce 100 cupcakes for $100 and 200 cupcakes for $150, what is the marginal cost per cupcake for the additional 100 cupcakes?

$0.50. To determine the marginal cost per cupcake for the additional 100 cupcakes, we need to find the change in cost for producing 200 cupcakes compared to producing 100 cupcakes. Since the cost of producing 200 cupcakes is $150 and the cost of producing 100 cupcakes is $100, the change in cost is $150 - $100 = $50. The marginal cost per cupcake is the change in cost divided by the change in quantity, meaning we divide $50 by 100 cupcakes. This gives us a marginal cost of $0.50 per cupcake.

Which of the following is most likely to be a fixed cost?

A LEASE ON A BUILDING

ECONOMIC AND NORMAL PROFIT

A firm earns an economic profit when profits are greater than zero after implicit costs are considered. A normal profit equals an economic profit of zero.

ECONOMIC AND NORMAL PROFIT

A normal rate of return is the return just sufficient to keep investors satisfied; it therefore represents the opportunity cost of capital. If a firm's rate of return on capital falls below the normal rate of return, investors will put their funds to use elsewhere.

Sunk costs

ALREADY INCURRED; CANNOT BE RECOVERED RATIONAL DECISIONS ABOUT FUTURE PROFITS IGNORE SUNK COSTS.

Economies of scale

As a firm's output increases, its long-run average total costs tend to fall. Economies of scale result from: specialization of labor and management. better use of capital. complementary production techniques.

Diseconomies of scale

As firms continue to grow, they eventually encounter diseconomies of scale as average total costs rise. This can be due to: increased bureaucracy in management, increased cost of a scarce resource used in production, increasingly difficult terrain or rising operational costs.

Production costs in the short run (average cost)

Average cost: A measure of productivity (in terms of cost efficiency). Average fixed cost: FC /Q. Average variable cost: VC /Q. Average total cost: TC /Q

Returns to scale

Average long-run costs change with output as economies of scale wear out.

Production in the short run (average product)

Average product is total output divided by the amount of labor input (Q /L).

Short run cost curves

Both the AVC and ATC curves are U-shaped. At relatively low levels of output, the curves slope downward, reflecting increasing returns as average costs fall. As production rises, diminishing returns set in, and average costs rise.

Consider the market for cereal in San Francisco, where there are over a thousand stores that sell cereal at any given moment. Suppose the Surgeon General issues a public statement saying that consuming cereal is bad for your health. Holding all else constant, this will lead to a:

Change in Demand.This public statement will lead to a leftward shift in the demand curve. This is because when consumers find out that eating cereal is bad for their health, they will decrease their consumption of cereal. The supply curve does not shift because none of the factors affecting supply have changed.

Consider the market for hamburgers in Dallas, where there are over a thousand burger joints at any given moment. Suppose an innovation in meat processing technology makes it possible to produce more hamburgers at a lower cost than ever before. Holding all else constant, this will lead to a:

Change in Supply. The innovation in meat processing technology lowers the cost of producing hamburgers. Therefore, for any given price, producers are willing and able to supply more hamburgers. This leads to a rightward shift in the supply curve. The demand curve does not shift because none of the factors affecting demand have changed.

_______________ refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period whereas __________________ refers to a specific number of units buyers want to buy at a specific price.

Demand and Quantity Demanded

Why might a movie theater charge a lower admission price for the first show on weekday afternoons than they do for a weeknight or weekend show?

Demand is lower for the weekday afternoon showing of the movie than for the weeknight or weekend showing. The supply of seats in the theater is same irrespective of weekday afternoon, weekday night or weekend.

What is wrong with the statement: Demand refers to the willingness of buyers to purchase different quantities of a good at different prices during a specific time period:

Demand refers to the willingness and ability of buyers, not just willingness.

Explicit Costs

Expenses paid directly to another entity (wages, utilities, lease payments, raw materials, taxes, etc.)

The price of 1 kg apples, which was $5 last month, is $6 today. True of False: The demand curve for apples must have shifted rightward between last month and today.

False. Change in price of the good leads to movement along the demand curve, not shift.

True or False: As the price of apples rises, the demand for apples falls, ceteris paribus.

False. It should be "quantity demanded" instead of "demand".

Production costs in the short run

Fixed costs (overhead) do not vary with the quantity produced. Variable costs rise as the level of output increases. Total costs are the sum of fixed and variable costs. TC = FC + VC. A cruise ship is a fixed cost, food on the cruise ship is a variable cost.

WHAT ARE SOME FIXED COSTS AND VARIABLE COSTS INCURRED BY SKI RESORTS?

Fixed costs include maintaining the chair lifts and operating the snow making equipment, costs that do not vary with the number of skiers. Variable costs include food, staff wages, and other costs that increase with the number of skiers.

Production costs in the long run

In the long run, all inputs can be adjusted; therefore, there are no fixed costs in the long run. Firms choose the plant size appropriate for their market; plant size can be adjusted as output levels change. Each plant size is associated with a unique long-run cost structure.

Long run average total cost

In the long run, firms build plants that achieve the lowest possible average cost based on the output level.

EXPLAIN WHY SOME STORES GO OUT OF BUSINESS EVEN AS THEY ARE EARNING A POSITIVE ACCOUNTING PROFIT

Making an accounting profit does not guarantee a successful business because many opportunity costs are not factored in to accounting profit. For example, if one works 80 hours per week running a sole proprietorship and earns only a small accounting profit, it is likely that economic profit is negative.

Production costs in the short run (marginal cost)

Marginal cost: The change in total cost from the production of one more unit of output. MC = ΔTC /ΔQ

Production in the short run (marginal product)

Marginal product is the change in output resulting from a one-unit increase in labor (ΔQ /ΔL). Marginal product initially rises as more workers are hired, then falls as diminishing returns set in.

PARTNERSHIPS

More than one owner, Can divide tasks among partners, Division of labor, Personal assets of all owners subject to unlimited liability, Includes negligence by partners

SOLE PROPRIETORSHIPS

One owner, Easy to start, Limited access to financial capital, Owner's personal assets subject to unlimited liability

Implicit Costs

Opportunity costs of using resources (forgone wages or earnings); not paid directly to another entity

Corporation

Owners called stockholders, Have legal rights (much like an individual), Can raise money by issuing stocks and bonds, Owners protected by limited liability, Losses limited to value of stock

Revenue

PRICE PER UNIT × QUANTITY

Economies of scope

PRODUCING INTERDEPENDENT PRODUCTS (AS DOES PROCTER & GAMBLE) HELPS TO REDUCE PRODUCTION AND MARKETING COSTS.

Which of the following is an explicit cost?

RAW MATERIALS

ACCOUNTING PROFIT

TOTAL REVENUE − EXPLICIT COSTS

ECONOMIC PROFIT

TOTAL REVENUE − EXPLICIT COSTS − IMPLICIT COSTS

Role of technology

Technology alters the shape of the long-run ATC curve. Enhances production techniques. Improves global communications. Provides computing power for easier expansion and economies of scale

Average fixed cost

The average fixed cost curve always decreases as production increases.

Long run

The long run is a period sufficient for a firm to adjust all factors of production, including plant capacity. Firms can enter or exit the industry.

Average and marginal costs

The marginal cost curve crosses the minimum points of the ATC and AVC curves.

Short run

The short run is a period when at least one factor of production is fixed and cannot be altered. Plant capacity is fixed.

Profits =

Total Revenue − Total Cost

Indicate how each of the following will affect the current supply (Increase supply or Decrease Supply) for personal computers. a) A rise in wage rates b) An increase in the number of sellers of computers c) A tax placed on the production of computers d) A subsidy placed on the production of computers

a) Decrease Supply b) Increase Supply c) Decrease Supply d) Increase Supply

With respect to each of the following changes, identify whether the demand curve will shift leftward or rightward. a) An increase in income (the good under consideration is an inferior good) b) A rise in the price of a complementary good c) A fall in the price of a substitute good d) A rise in the number of buyers

a) Demand Curve will shift leftward b) Demand Curve will shift leftward c) Demand Curve will shift leftward d) Demand Curve will shift rightward

Consider the market for laptops in 2015. Between 2015 and 2016, the equilibrium price of laptops remained constant , but the equilibrium quantity of laptops increased. From this, you can conclude that between 2015 and 2016, the supply of laptops ________________ and the demand for laptops _______________.

a) Increased b) Increased Because the price of laptops remained constant, both the demand curve and the supply curve must have shifted to the right.

Consider the demand curve for Sedans in the United States. For simplicity, assume that all sedans are identical and sell for the same price. Also, assume that: The current market price of Sedans is $30,000. Average Household income is $60,000 per year. Price of a gallon of gas is $5 per gallon. Price of a subway ride is $2.50. Suppose the price of a sedan decreased from $30,000 to $25,000. This would cause a ________________ the demand curve. If an increase in average income causes a rightward shift of the demand curve, then you may conclude that sedans are a _____________ good. Suppose that the price of a gallon of gas rises from $5 to $6. Because sedans and gasoline are _____________, an increase in the price of a gallon of gas shifts the demand curve for sedans to the ____________.

a) Movement along b) Normal c) Complements d) Left

Two factors that affect the supply of sedans are the level of technical knowledge - in this case, the speed with which manufacturing robots can fasten bolts, or robot speed - and the wage rate that auto manufacturers must pay their employees. Initially, the robots can fasten 2500 bolts per hour, autoworkers earn $25 per hour, the price of a sedan is $30,000 and the quantity supplied (Sedans per month) is 250. Suppose that the price of a sedan decreases from $30,000 to $25,000. This would cause the ______________ of sedans to decrease , which is reflected on the graph by a _______________ supply curve. Following a technological decline - for example, a decrease in the speed with which robots can attach bolts to cars - there is a __________________ shift of the supply curve because the technological decline makes cars more expensive to build.

a) Quantity Supplied b) Movement along the c) Leftward

ACCOUNTING COSTS

include only explicit costs

TYPES OF FIRMS

sole proprietorships, partnerships, corporations