Download - 02 fc vs vc costs
![Page 1: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/1.jpg)
Verbal Bellringer with your partner
This is a financial statement for FacebookA.How much revenue did they make last year?
B.How much profit did they keep last year?C.How have they been doing the last four years?
D.Is this a good stock to buy?
![Page 2: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/2.jpg)
• Costs!
• Chapter 14
• Theory of the firm
![Page 3: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/3.jpg)
THE COSTS OF PRODUCTION
3
Total Revenue, Total Cost, Profit
• We assume that the firm’s goal is to maximize profit.
Profit = Total revenue – Total cost
the amount a firm receives from the sale of its output
the market value of the inputs a firm uses in production
![Page 4: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/4.jpg)
THE COSTS OF PRODUCTION
4
Costs: Explicit vs. Implicit• Explicit costs require an outlay of money,e.g., paying wages to workers.
• Implicit costs do not require a cash outlay,e.g., the opportunity cost of the owner’s time.
• Remember one of the Ten Principles: The cost of something is what you give up to get it.
• This is true whether the costs are implicit or explicit. Both matter for firms’ decisions.
![Page 5: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/5.jpg)
THE COSTS OF PRODUCTION
5
Explicit vs. Implicit Costs: An ExampleYou need $100,000 to start your business.
The interest rate is 5%. • Case 1: borrow $100,000
– explicit cost = $5000 interest on loan
• Case 2: use $40,000 of your savings, borrow the other $60,000– explicit cost = $3000 (5%) interest on the loan– implicit cost = $2000 (5%) foregone interest you
could have earned on your $40,000.
In both cases, total (exp + imp) costs are $5000.
![Page 6: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/6.jpg)
THE COSTS OF PRODUCTION
6
Economic Profit vs. Accounting Profit
• Accounting profit = total revenue minus total explicit costs
• Economic profit= total revenue minus total costs (including
explicit and implicit costs)• Accounting profit ignores implicit costs,
so it’s higher than economic profit.
![Page 7: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/7.jpg)
The equilibrium rent on office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if
a. you rent your office spaceb. you own your office space
A C T I V E L E A R N I N G A C T I V E L E A R N I N G 22 Economic profit vs. accounting profitEconomic profit vs. accounting profit
7
![Page 8: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/8.jpg)
The rent on office space increases $500/month. a. You rent your office space.
Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month.
b.You own your office space.Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month.
A C T I V E L E A R N I N G A C T I V E L E A R N I N G 22 AnswersAnswers
8
![Page 9: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/9.jpg)
With your partner
• 2 items at your house that the more you use them, the more you will pay
• 2 items you can use 24/7 and you don’t have to pay more
![Page 10: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/10.jpg)
An unsuccessful business
• Costs that they can change tomorrow
• Costs that they can’t change
![Page 11: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/11.jpg)
Let’s think more specifically about costs
• Fixed Costs = costs that do not change based on production and don’t change in SR
• Examples: capital goods, tools, buildings, menus
Nokia factory in Finland
Coke factory in Atlanta, Georgia
![Page 12: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/12.jpg)
Special fixed costs
• “Entry costs” – costs to start up the business
Business with lowEntry costs
Business with very highEntry costs
![Page 13: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/13.jpg)
Costs we can change in the short run
Variable costs = costs that change based on production
The more I produce, the more cost I will incur.
If I don’t produce at all, my variable costs will be 0
For example: labor, electricity, raw materials
Nike factory in China
![Page 14: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/14.jpg)
Michael Jordan visiting Nike Factory in 1999 Why produce in China?
![Page 15: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/15.jpg)
Marginal Costs
• Marginal costs = the cost of producing 1 additional unit
• For example:
• Why helpful?• Diminishing
marginal product!
Widgets
01234
FC
11111
VC
06
111622
MC
X
![Page 16: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/16.jpg)
Total Costs• Total Costs = fixed + variable costsFor example:
Widgets
01234
FC
11111
VC
01235
TC
12346
MC
X1112
Revenue
02468
Assume Widgets price
$2/eachProfit
-10122
![Page 17: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/17.jpg)
Averages
• Do you guys bring up or down the GPA of all of Flowing Wells high school?
• Does the cross country team bring up or down the average weight of Flowing Wells High School?
• Does a high average cost of living mean that everyone spends a lot to live in California?
![Page 18: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/18.jpg)
Average Costs• Average Fixed Costs = FC/Q• Average Variable Costs = VC/Q• ATC = TC/Q
![Page 19: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/19.jpg)
In your notes1. Write 3 examples of FC for this firm2. Write 3 examples of VC for this firm3. How could this firm increase its TR?4. Give an example of diminishing marginal
returns from your life
![Page 20: 02 fc vs vc costs](https://reader034.vdocuments.us/reader034/viewer/2022052705/58aafde81a28abd35e8b556d/html5/thumbnails/20.jpg)
Group assignment1
2