Economics Ch.13: The Costs of Production
Average Total Cost (definiton); the 2 formulas:
Simply are the "per-unit" costs. If we take the total cost and divide it by the quantity, we will get a cost per unit of output at that quantity produced. ATC = Total Cost / Quantity If TC = $100 when we produce 20 units, then $100/20 = $5 per unit. Hence Each unit costs about $5 to produce. ATC is also = AFC (Average Fixed cost) + AVC (Average Variable cost).
Economies of Scale = scale means
Size
The production function graph
Tells us the maximum output we get from a given set of (or additional) inputs.
What does stock or share mean.
They are used interchangeably. Stock or share: certificate of partial ownership of a public company that can be traded in a stock (or shares) exchange market.
Total Cost Formula
Total Cost = Fixed Costs + Variable Costs
Total Product
Total Product is the total quantity of a good produced in a given period.
Formula for total profit
Total Profit = Total Revenue (TR) - Total Cost (TC)
Average Fixed Cost (AFC) Average Variable Cost (AVC)
is equal to Fixed Cost/ Quantity. is equal to Variable Cost/ Quantity.
Marginal Cost Formula
ΔTC or "Change in Total Cost" over ΔQ or "Change in Quantity"
A private company
does not have its ownership shares traded on an exchange.
Explain the law of Diminishing Marginal Returns
1. As we continue to add workers to the production processOutput increases initially as the work is divided into separate tasks (specialization). For instance: If we have 1 worker to take the order and also make the fish taco; so he's doing everythin.g if we add 1 more worker, there is more specialization, we get more additional outpout with with an additional worker 2. Yet as we continue to add more labor (workers), our fixed inputs (land and capital) do not change and we have "crowding" of the workers; confined within the limited fixed inputs. 3. Hence at some point each additional worker produces less output than the previous worker. 4. Note output will definitely increase with the increase of an additional worker but at this last point, the amount of OUTPUT INCREASE will be at a DECREASING RATE. 5. EVENTUALLY however the output curve FLATTENS OUT and adding one more resource will not cause a change in the output produced; sad :(
Total Revenue Formula
= Price x Quantity
Fixed Resource or fixed input : (include exmaples); explain (hint: short-run vs long-run). What's the opposite of a fixed resource?
A fixed resource remains unchanged (in the short run of coruse bec. on the long run, all types of resources can be modified) as output increases. Example include the land, buildings, police vehicles (these can not be modified in the short run like from semester to semester); chairs in the classroom. A variable resource
Why is the curve for average fixed cost always downward?
AFC is downward-sloping because the quantity on the x-axis (denominator) is always increasing while the numerator (Fixed Cost) on the y-axis is fixed.
ATC is U-shaped because
ATC is U-shaped because of the initial dominance of AFC curve and the later dominance of the rise of AVC curve.
ATC is the summation of
ATC is the summation of AVC and AFC.
Why is the curve for AVC always rising?
AVC rises as the rate of output increases because of diminishing marginal returns.
Accounting cost of production.
Accounting Cost measures costs of the resources that receive a (monetary) payment for their use
Accounting Profit formula
Accounting Profit = Total Revenue - explicit costs
Examples of accounting cost
Accounting cost: teacher getting paid for teaching; Janitors for their janitorial work.
Compare accounting vs economic profit for e.g. which is higher?
Accounting profit will always be higher than economic profit.
what is Zero Economic Profit? Synonyms?
Also called Normal Profit. It means that the economic profit is 0. Economic profit = total revenue - (explicit + implicit cost) since the value = 0, this means that the firm has just enough revenues to pay for all of its (different types of) costs and hence can continue producing in the future because it can still afford to purchase the costs of production.
Given these values: Amount of Labor: 1,2,3 and 4 workers respectively. The output produced respecitvely is 1,5,8 and 10. VC is $50,100,150 and 200 respecitvly. Explain what is AVC here and calculate AVC for each of the 4 values. Explain why does it decrease (keywords) and then increase. (keywords)
Average Variable Cost is the VC Cost divided by the quantity produced for that cost. For instance, the AVC for 2 workers is $100 dollars divided by the total quantity produced by the 2 workers. In this case. it is $100/5 = $20 per unit of output. So in other words if the employer hires 2 workers it will appear that he's paying an average of 20 dollars for each quantity of product produced. AVC for 3 workers = 150/8 which is $18.75. In other words, it will appear that if the employer hires 1 more worker, it will appear that he's paying an average of 18.75 dollars per quantity produced so it is advanatgeous for him to hire one more worker because he will produce more output with an average lower price per output. In other words the opportunity cost of paying for that worker is offset highly by the decrease in average cost that he's paying per quantity produced. This is due to SPECIALIZATION OF RESOURCES. For instance the additional worker that he hires can now focus on charging the customers in stead of having the previous two workers do the charging, cooking and the serving of the clients. One worker can charge, one worker can cook and one worker can serve which will then lead to a good increase in output at a lower average cost. Yet, as he hire more workers, they will be more confined in the space and while the output will still increase a little bit the average variable cost per unit of output will INCREASE due to the LAW OF DIMINISHING MARGINAL RETURNS. (See table: Short-run Costs and observe how AVC decreases at first and then increases - not necessary to do that though :) )
Synonyms for the word Firms
Business, enterprise, company
Economic Cost Formula
Economic Cost = explicit cost + implicit cost
Total Cost is synonymous with
Economic Cost.
Economic Profit formula? (2 FORMULAS)
Economic Profit = Total Profit = Total Revenue - (explicit costs + implicit costs) OR Economic Profit = Accounting Profit - implicit costs
Synonym with Accounting Cost
Explict Cost
Firms can be .....,......, or ..... (in terms of ownership) They can be ...... or ...... (on a national level).
Firms can be sole proprietorships (ownership), partnerships and corporations. Can be national or multinational.
Define Fixed/Variable Costs.
Fixed costs do not change when output changes. Variable costs change when output changes.
Public Company
Has its shares of ownership traded on a stock exchange.
If open restaurant, read but try to guess on the next slide what will be the fixed inputs?
If you open a restaurtnat, fixed input: will be sqaure footage of the land, the rent for the lease, tables and chairs which won't be changes even if the place was too crowded.
Economic Cost of production.
In addition to accounting cost, it includes the Opportunity Cost of producing goods and services even no cash payment is incurred.
Will the cost of land be included in the economic or the accounting cost?
Land will not be included in accounting cost because it doesn't directly receive payment. Rather, there is an opportunity cost because we can use the land where golden west college for building of another entity like shopping mall; hence it will be accounted for in the economic not accounting cost.
Diseconomies of scale will more likely to happen in (small,medium,large)-sized firms; explain; economies of scale will more likely happen in (small,medium,large) while unit constant economies of scale will more likely happen in
Large,In other words, a firm may suffer from ineffisicineis and hence incur diseconomies of scale if it becomes too large a size. Small Medium
Example of Diseconomies of scale
Like inefficiencies of some workers so the cost of producing an additional unit increases (bad for the producer)
What happens to MPP as we increase the amount of input or resources? Why?
MPP: keps going down eventually as we add more resources (e.g.) workers, this is weird but it is due to fixed resources like because of fixed space for workers to work in comfortably hence workers are not able to produce to optimal level.
What is the goal of business? What about charitable organizations
Make money or maximize profit; including charitable organizations so they can distribute more charity.
Marginal Physical Product (MPP) Defintion, synonyms
Marginal Physical Product or Marginal Product of Labor is the change in output (total product) when we add one additional unit of labor.
Types of Production Costs
Production costs are divided into two types: fixed costs variable costs
Examples of Public vs Private Companies (just read but try to notice them)
Public Compnay: ex. Facebook, apple, home depot, McDonald's, Coca-Cola Private Company: ex. In'n'Out,
Resources used in producing output include (4)
Resources include: labor, land, Capital and sometimes Entreprenuership.
Marginal Cost definition (2)
The cost of producing one additional unit of output. Also total change of cost dvidied by total change in quantity of output. (which will give us first definition;lol)
Economies of scale
The decrease in per unit costs of a certain product as the quantity of production (of that product) increases and all resources are variable. (so only applies to long-run)
The most important difference between short and long-run is that (hint: diminishing marginal returns)
The law of diminishing marginal returns (like fixed cost for instance) does not apply when all resources are variable (long run) because of the economies of scale. That means that marginal cost, AVC, MPP all won't decrease if there is economies of scale.
Define long-run
The long run is a period long enough that a firm is perfectly flexible in its choice of all inputs, including its production facility like land(no such things as FIXED inputs/costs). All resources are variable.
Short-run average total cost (SRATC):
The lowest cost of producing any level of output when at least one of the resources is fixed.
Minimum ATC is ..... and represents:
The lowest per unit cost; Represents the lowest possible opportunity cost to society.
Short-run
The short run is a period of time when the firm has at least one fixed input that they cannot change (production facility). Some resources are fixed
To calculate total cost we add the
Variable and Fixed costs
Example of Fixed/Variable Cost. What's good to remember!?
Variable cost is usually labor. Fixed cost is usually land, production facilities and capital. Remember however that these definitions are not carved in stone. For instance raw material is considered land and if we have a crowded day in the restaurant we will utilize more raw material to cook the food but we can't utilize more actual land because it is fixed. we can't utilize actually capital (like pans and cups, etc because it is fixed. Good to memorize that in general that cost for land and capital is fixed and cost for labor is variable.
When MC > ATC, ATC .......; when MC < ATC, ATC ......; explain with an example
When marginal cost is greater than ATC, ATC rises. When marginal cost is less than ATC, ATC decreases. If a kid 4 years old comes into our class room this will decrease our average age
AVC will decrease at first due to
Will decrease at first due to specialization of resources then it will increase.
Marginal Costs increase as we expand output
due to diminishing returns. Makes sense because if you're done hiring 3 workers; eahc of them will specialize in something, then you hire more workers that are going to be less efficient due to space limitation or confinement, laziness, etc. Hence MC that you incur of producing one additional output will increase at a lost because the cost that you're paying to hire more workers for just one additional unit of output to be produced is high (per unit of output) - really confusing but try to understand it; who cares just memorize the answer.
The production function becomes .... as the number of workers increases. This represents
flatter; the property of diminishing marginal return,
AVC will eventually rise (after it was initially decreases) as the rate of output increases because
of law of diminishing marginal returns.
The MC curve crosses the ATC curve at
the ATC curve minimum point. (minimum ATC)
Diseconomies of scale:
the increase in per unit costs as the quantity of production increases and all resources are variable.
Long-run average total cost (LRATC):
the lowest cost of producing any level of output when all resources are variable.
Total Cost = FC + VC (What does that mean though)
the opportunity cost of the resources (capital, land, labor, entrepreneurship) we use to produce our output.
long run refers
to a period of time at which everything (like the resources) is variable - nothing is fixed.
The short run refers
to any period of time during which exists at least 1 fixed resource, one resource cannot be changed.
Constant returns to scale:
unit costs remain constant as the quantity of production increases and all resources are variable.
