econ quiz 1
kentucky79
Tucker.Ch07_LECTURE_SLIDES_EFT_9e.ppt*
Chapter 7
Production Costs
Lecture Slides
Economics for Today
Irvin B. Tucker
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What is the purpose of this chapter?
- The purpose of this chapter is to study production and its relationship to various types of costs
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What is a basic assumption in economics?
- The motivation for business decisions is profit maximization
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To understand profit, what is necessary?
- To distinguish between the way economists measure costs and the way accountants measure costs
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What are explicit costs?
- Payments to nonowners of a firm for their resources
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What are implicit costs?
- The opportunity costs of using resources owned by the firm
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What is an example of implicit costs?
- When a firm uses its own resources, such as the owner’s labor, land, building, or savings, the firm gives up the opportunity of earning a return on its resources.
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What are total opportunity costs?
Explicit costs + Implicit costs
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What is
economic profit?
- Total revenue minus explicit and implicit costs, or total revenue minus total opportunity costs
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What is normal profit?
- The minimum profit necessary to keep a firm in operation
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What about opportunity cost?
- A firm that earns normal profits earns total revenue equal to its total opportunity cost
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How is accounting profit defined?
- Total revenue minus total explicit costs
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What conclusion can we make?
- Since business decision making is based on economic profit, rather than accounting profit, the word profit in this text always means economic profit
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What is a fixed input?
- Any resource for which the quantity cannot change during the period of time under consideration
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What is a
variable input?
- Any resource for which the quantity can change during the period of time under consideration
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What is the short run?
- A period of time so short that there is at least one fixed input
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What is the long run?
- A period of time so long that all inputs are variable
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What is the
production function?
- The relationship between the maximum amounts of outputs a firm can produce and various quantities of inputs
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What do technological advances make possible?
- More output is possible from a given quantity of inputs
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What is
marginal product?
- The change in total output produced by adding one unit of a variable input, with all other inputs used held constant
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What is the law of diminishing returns?
- The principle that beyond some point the marginal product decreases as additional units of a variable resource are added to a fixed factor
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What does the law of diminishing returns assume?
- Fixed inputs; it is therefore a short-run concept
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
40
10
1
2
4
Exhibit 2 (a) Total Output Curve
30
20
5
50
6
3
60
Total Product
Quantity of Labor
Total Output
0
(number of workers per day)
(bushels of grapes per day)
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
2
1
2
4
Exhibit 2(b) Marginal Product Curve
6
4
5
10
6
3
12
Marginal Product
Quantity of Labor
0
Marginal Product
Law of Diminishing Returns
(number of workers per day)
(bushels of grapes per day)
*
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is
total fixed cost?
- Costs that do not vary as output varies and that must be paid even if output is zero. For example, rent, interest on loans, and property taxes.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is
total variable cost?
- Costs that are zero when output is zero and vary as output varies. Examples are wages, electricity, fuel, and materials.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is total cost?
- The sum of total fixed cost and total variable cost at each level of output
TC = TFC + TVC
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What is
average fixed cost?
- Total fixed cost divided by the quantity of output produced
AFC = TFC / Q
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is average variable cost?
- Total variable cost divided by the quantity of output produced
AVC = TVC / Q
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is
average total cost?
- Total cost divided by the quantity of output produced. Also called per-unit cost.
ATC = TC/Q OR ATC=AFC +AVC
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What is marginal cost?
- The change in total cost when one unit of output is produced
MC = TC/Q
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 4(a) Short-Run Cost Curves
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 4(b) Short-Run Cost Curves
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is the
marginal-average rule?
- When MC < AC, AC falls
- When MC > AC, AC rises
- If MC = AC, AC at minimum
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What is the relationship between slopes of the MC and MP curves?
- The rising portion of the MP curve corresponds to the declining portion of the MC curve, and vice versa
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What is the relationship between the minimum and maximum points of the MR and MP curves?
- The maximum point of the MP curve corresponds to the minimum point of the MC curve
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Marginal cost’s mirror image
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8
2
1
2
4
Exhibit 6(a) Marginal Product Curve
6
4
5
10
6
3
12
Marginal Product
Quantity of Labor
0
MP
Law of Diminishing Returns
(number of workers per day)
(bushels of grapes per day)
Maximum
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16
12
8
4
20
24
Exhibit 6(b) Marginal Cost Curve
MC
Marginal Cost (dollars)
0 10 20 30 40 50 60
Quantity of output (bushels of grapes per day)
Minimum
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What is the long-run average cost curve?
- The curve that traces the lowest cost per unit at which a firm can produce any level of output when the firm can build any desired plant size
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
6
4
2
2
4
6
8
10
12
10
12
14
16
Exhibit 8 Long-run Average Cost Curves
Short-run average total cost curves
Long-run average cost curve
Quantity of Output (units per hour)
Cost per unit (dollars)
0
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What are
economies of scale?
- A situation in which the long-run average cost curve declines as the firm increases output
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What are constant returns to scale?
- A situation in which the long-run average cost curve does not change as the firm increases output
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What are
diseconomies of scale?
- A situation in which the long-run average cost curve rises as the firm increases output
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Q1
Exhibit 9 Long-run Average Cost Curve
Economies of scale
Constant returns to scale
Diseconomies of scale
LRAC
Quantity of Output
Cost per unit (dollars)
0
Q2
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