- requires an outlay of money, - doesnt require a cash outlay, ―paying wages ―paying rent...
DESCRIPTION
eFarmer.us is a time period so short at least one input is fixed is a time period so long that all inputs can change ―Factory ―Special equipment ―Land Short Run Long Run Firms can build more factories or sell existing ones Cost for a fixed input is termed Fixed CostTRANSCRIPT
eFarmer.us
- requires an outlay of money,
- doesn’t require a cash outlay,
― paying wages― paying rent― paying interest
― the owner’s time― the owner’s property― the owner’s money
lost wagesforgone rental incomeforgone interest income
payment to non owners for resources:Explicit costs
Implicit costs opportunity cost:
eFarmer.us
Shoe Co.Revenue $300,000
Explicit Cost $250,000Accounting ProfitTeacher $30,000
Economic Profit $20,000
Principal $50,000Superintendent $100,000$50,000
Worker Wages $100,000Rent Expense $50,000Leather Cost $100,000
ExplicitExplicitExplicit
$0Economic Profit - $50,000Economic Loss
Implicit
Accounting profit - total revenue minus total explicit costs
Accounting profit ignores implicit costs and it’s always higher than economic profit.
Economic profit - total revenue minus total costs (includes explicit and implicit costs)
eFarmer.us
is a time period so short at least one input is fixed
is a time period so long that all inputs can change
― Factory― Special equipment― Land
Short Run
Long RunFirms can build more factories or sell existing ones
Cost for a fixed input is termed Fixed Cost
eFarmer.us Production Function - Hay
Copyright 2009 eStudy.us [email protected]
Production Functionshows the relationship between the level of inputs used to produce output
― Labor to cars― Water to hay― Grass to beef
with at least one fixed inputthe production function is a short run concept
eFarmer.us Production Function - HayTractor and WagonImplies Maximum Output per Worker
Copyright 2009 eStudy.us [email protected]
LaborHay per Hour
01234567
010255065758080
101525151050
$8/10=$8/15=$8/25=$8/15=$8/10=$8/5=
Wage = $8
0.800.530.320.530.801.60
- A fixed resource- Production efficiency
𝑀𝐶=𝑊𝑎𝑔𝑒𝑀𝑃
Marginal Product (MP): output produced by using one more variable input
Diminishing Marginal Product MP increasing at a decreasing rate
𝑀𝑃=∆𝑄∆ 𝐿
eFarmer.us Production Function - Hay
Copyright 2009 eStudy.us [email protected]
Diminishing Marginal Product
Using the Hay example
0.32
Minimum Marginal Cost corresponds to maximum Marginal Product
50
0.80
10 MP
1 2 3 4 5 6
25
Hay
Workers
MC
10 25 50 65 75 80 Hay
$
TP
1 2 3 4 5 6 Workers
Hay
eFarmer.us Short Run Cost of Production
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TFC$10
- Fixed Cost (TFC)
Q0123456789
$10$10$10$10$10$10$10$10$10
TVC$0$4$7$11$18$28$47$74$112$162
TC$10$14$17$21$28$38$57$84$122$172
MC
$4$3$4$7$10$19$27$38$50
- Variable Cost (TVC)
AFC --$10.00$5.00$3.33$2.50$2.00$1.67$1.43$1.25$1.11
AVC --$4.00$3.50$3.67$4.50$5.60$7.83$10.57$14.00$18.00
ATC --$14.00$8.50$7.00$7.00$7.60$9.50$12.00$15.25$19.11
- Total Cost (TC)
costs that don’t vary as output changes costs that do vary as output changes TC = TFC + TVC
- Marginal Cost (MC) the cost of producing one more output (Q)
𝑀𝐶=∆𝑇𝐶∆𝑄
AFAVAT
eFarmer.us Cost of ProductionCalculation Equations
Copyright 2010 eStudy.us [email protected]
at Q = 6
01
01
QQTCTC
QTCMC
19$119$
5638$57$
QTFCAFC
83.7$647$
Q
TVCAVC
67.1$610$
QTCATC
AFCATCATC
50.9$657$
50.9$67.1$83.7$
eFarmer.us Cost Curves
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MC
AVC
ATC
1 2 3 4 5 6 7 8 9
$9.50
$7.83
$19.00
$1.67AFC
The MC curve intersects the ATC curve at minimum average total cost.
— when MC < ATC, ATC falls as Q rises— when MC > ATC, ATC rises as Q rises
$
Q
eFarmer.us Long Run Cost Curves
Copyright 2010 eStudy.us [email protected]
Q
$
Q
$
Q
$
LRAC LRAC
LRAC
ATC rises as Q increases
Economies of scale
ATC falls as Q increases
Constant returns to scale
ATC stays the same as Q increases
Diseconomies of scale
Owner’s can change any input, all costs are variable
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