Chapter 13 The cost of production

Math section/how to the

Marginal product between 1&2 is the difference between the Quantity of BLANK the two EX: 1, 10 2, 19 Is 9

Total Revenue #

the amount a firm receives for the sale of its output Quantity of output the prefixes times the price at which it sells it output

marginal product #

the increase in output that arises from an additional unity of input -Slope of the production function

marginal cost

the increase in total cost that arises from an extra unit of production Marginal cost=change in total cost/Change in quantity MC= TC/Q

Total Cost

the market value of the inputs a firm uses in production -Explicit costs -Implicit costs (opportunity costs)

Economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

Diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases Production function gets flatter as more inputs are being used The slope of the production function decreases The total cost curve is u-shaped because production exhibits diminishing marginal product

efficient scale

the quantity of output that minimizes average total cost

production function #

the relationship between quantity of inputs used to make a good and the quantity of output of that good -Gets flatter as production rises

average total costs

total cost divided by the quantity of output Average total cost is falling when the marginal cost is below it and rising when marginal cost is above it

Profit

total revenue minus total cost

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue minus total explicit cost Usually larger than economic profits

average variable cost

variable cost divided by the quantity of output

What is profit?

Assumption -Goal of a firm is to maximize profit Profit -Total revenue minus total cost

marginal cost

is the amount that total cost and rises when the firm increases production by 1 unit of output. Therefore, you can compute the marginal cost of the 15th unit of output in the following way:Marginal Cost = $180/15. Similar calculations can be made to complete the remainder of the column.

Total Cost

is the sum of fixed cost and variable cost. Fixed costs are costs that do not vary with the quantity of output produced, and variable costs are costs that change as the firm alters the quantity of output produced. $120+($60×Number of Workers). Therefore, the total cost of hiring 0 workers is $120, the total cost of hiring 1 worker is $180, and so on.

average total cost

is total cost divided by the quantity of output. It represents the cost of a typical unit of output if total cost is divided evenly over all the units produced. Therefore, you can compute the average total cost of the 15th unit in the following way:$120+($60×Number of Workers)/(Number of Units Produced)

Marginal Product

of any input in the production process is the increase in the quantity of output obtained from one additional unit of that input. When the number of workers goes from 0 to 1, broom production increases from 0 to 15, so the marginal product of the first worker is 15 brooms. Similar calculations can be made to complete the remainder of the column.

The cost of financial capital as an opportunity cost #

-Implicit cost -Interest income not earned on financial capital -Owned as saving -Invested in business -Not shown as cost by an accountant

Relationship between MC and ATC

-When MC < ATC: average total cost is falling -When MC > ATC: average total cost is rising -The marginal-cost curve crosses the average-total-cost curve at its minimum

Total-cost curve, Marginal- and Average Cost curves

Check table above Figure in page 282 Many firms, like Big Bob's Bagel Bin, experience increasing marginal product before diminishing marginal product and, therefore, have cost curves like those in this figure. Panel (a) shows how total cost (TC) depends on the quantity produced. Panel (b) shows how average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC) depend on the quantity produced. These curves are derived by graphing the data from Table 13-3. Notice that marginal cost and average variable cost fall for a while before starting to rise.

Hungry Helen's Total-Cost curve

Figure in 275 A total-cost curve shows the relationship between the quantity of output produced and total cost of production. Here the quantity of output produced (on the horizontal axis) is from the second column in Table 13-1, and the total cost (on the vertical axis) is from the sixth column. The total-cost curve gets steeper as the quantity of output increases because of30 diminishing marginal product.

Economists vs Accountants

Figure in page 272 Economists include all opportunity costs when analyzing a firm, whereas accountants measure only explicit costs. Therefore, economic profit is smaller than accounting profit

THIRSTY THELMA'S TOTAL-COST CURVE.

Figure in page 276 Here the quantity of output produced (on the horizontal axis) is from the first column in Table 13-2, and the total cost (on the vertical axis) is from the second column. As in Figure 13-3, the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product

THIRSTY THELMA'S AVERAGE- COST AND MARGINAL-COST CURVES

Figure in page 279 This figure shows the average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC) for Thirsty Thelma's Lemonade Stand. All of these curves are obtained by graphing the data in Table 13-2. These cost curves show three features that are considered common: (1) Marginal cost rises with the quantity of output. (2) The average-total-cost curve is U- shaped. (3) The marginal-cost curve crosses the average-total- cost curve at the minimum of average total cost.

Average total cost in the short and long run

Figure in page 284q Because fixed costs are variable in the long run, the average-total- cost curve in the short run differs from the average-total-cost curve in the long run

The many type of cost: a summary

In page 286

Various measures of cost

U-shaped average total cost curve ATC = AVC + AFC AFC - always declines as output rises AVC - typically rises as output increases Because of diminishing marginal product The bottom of the U-shape At quantity that minimizes average total cost

Fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that do vary with the quantity of output produced

A production function and total cost: Hungry Helen's cookie factory

figure in 274 page A production function shows the relationship between the number of workers hired and the quantity of output produced. Here the number ofworkers hired (on the horizontal 130 axis) is from the first column in Table 13-1, and the quantity ofoutput produced (on the verticalaxis) is from the second column.The production function gets 90 flatter as the number of workers increases, which reflects diminishing marginal product.

average fixed cost

fixed cost divided by the quantity of output is always falling as the quantity of output increases

Total cost

fixed costs plus variable costs

implicit costs

input costs that do not require an outlay of money by the firm The opportunity cost of running a business that does not involve cash outflow is a(an) implicit cost

Explicit costs

input costs that require an outlay of money by the firm