The Costs of Production

(Chapter 21)

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Scoresheet Section: AP MICROECO 21

3rd Cycle-6wk-PR6

Quiz 1Feb 4, 2013% 100

Chapters 1-3 HW OutlinesFeb 5, 2013% 100

Unit 1 ExamFeb 8, 2013% 100

Personal Business Project IFeb 10, 2013% 100

Activities 9 & 13Feb 18, 2013% 100

Activity 14Feb 18, 2013% 100

Activity 2Feb 18, 2013% 100

Quiz 2Feb 22, 2013% 100

AP Economics Exam 2Feb 26, 2013% 100

Shadenfreude ProjectFeb 28, 2013% 100

280288 B 84% 85% 100% 80% 70% 84% 100% 100% 90% 82.50% 100%

285165 F 58% 75% 90% 63% 0% 56% 70% 100% 0% 42% 80%

285205 F 64% 65% 95% 72% 50% 68% 50% 100% 65% 40% 80%

739677 C 76% 85% 99% 79% 88% 72% 50% 100% 65% 63.50% 90%

740118 D 73% 80% 100% 83% 0% 84% 75% 100% 60% 59% 90%

741028 C 77% 95% 95% 87% 61% 80% 50% 100% 65% 63% 100%

751177 F 65% 80% 80% 80% 62% 68% 50% 100% 0% 50% 70%

751325 D 71% 85% 99% 85% 85% 68% 60% 100% 0% 53.50% 70%

751357 A 92% 100% 100% 91% 100% 96% 100% 100% 90% 91.50% 100%

751358 D 71% 88% 90% 80% 70% 80% 50% 100% 83% 47% 85%

752018 B 81% 100% 100% 80% 100% 88% 60% 100% 90% 67% 85%

752387 C 78% 90% 100% 79% 88% 72% 50% 100% 0% 79% 90%

752761 D 73% 75% 100% 79% 100% 64% 70% 100% 0% 62.50% 85%

755537 D 70% 80% 100% 75% 85% 64% 70% 100% 88% 48% 90%

761413 D 71% 80% 80% 83% 60% 84% 80% 100% 0% 63% 70%

767485 F 67% 60% 80% 78% 0% 88% 100% 100% 0% 58% 80%

773721 F 66% 85% 90% 75% 60% 84% 60% 100% 0% 46% 90%

780990 C 76% 90% 90% 76% 88% 80% 75% 100% 0% 70% 85%

792886 F 63% 105% 0% 79.75% 0% 100% 75% 100% 0% 68% 70%

794714 D 72% 93% 80% 88% 81% 72% 50% 100% 0% 59% 90%

841405 65% 65% 85% 73% 76% 50% 100% 0% 44% 90%

875244 B 85% 90% 100% 92% 100% 100% 100% 100% 85% 62% 100%

926549 A 97% 100% 95% 100% 92% 76% 100% 100% 90% 100% 85%

Grading is not fun!!!

The Costs of Production

The Law of Supply:Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.This results in a supply curve that slopes upward.

The Firm’s Objective

The economic goal of the firm is to maximize profits.

A Firm’s Profit

Profit is the firm’s total revenue minus its total cost.

Profit = Total revenue - Total cost

Costs as Opportunity Costs

A firm’s cost of production includes all the opportunity costs of making its output of goods and

services.

Explicit and Implicit Costs

A firm’s cost of production include explicit costs and implicit costs.

Explicit costs involve a direct money outlay for factors of production. Implicit costs do not involve a direct money outlay.

Economic Profit versus Accounting Profit

When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than

accounting profit.

Economic Profit versus Accounting Profit

Revenue

Totalopportunitycosts

How an EconomistViews a Firm

Explicitcosts

Economicprofit

Implicitcosts

Explicitcosts

Accountingprofit

How an AccountantViews a Firm

Revenue

Total Revenue……….. $50,000Cost of making Cheetos…. $30,000Laborers' wages… $7,000Utilities… $5,000Total Explicit Costs… $42,00

8,000 is what?

BUT

Forgone interestForgone rentForgone wagesForgone entrepreneurial income

… These are examples of implicit costs which must be subtracted from accounting profit to figure economic profit

Ask yourself… Is it worth it?

Marginal Product

The marginal product of any input in the production process is the increase in the quantity of output obtained from an additional unit of that input.

Marginal Product

Additional input

Additional output=Marginalproduct

Diminishing Marginal ProductDiminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.

Diminishing Marginal Product

The slope of the production function measures the marginal product of an input, such as a worker.

As the marginal product declines, the total production curve slopes downward

From the Production Function to the Total-Cost Curve

The relationship between the quantity a firm can produce and its costs determines pricing decisions.

The total-cost curve shows this relationship graphically.

A Production Function and Total Cost

Number ofWorkers

Output MarginalProduct of

Labor

Cost ofFactory

Cost ofWorkers

Total Cost ofInputs

0 0 $30 $0 $30

1 50 50 30 10 40

2 90 40 30 20 50

3 120 30 30 30 60

4 140 20 30 40 70

5 150 10 30 50 80

Hungry Helen’s Cookie Factory

Total-Cost Curve...TotalCost

$80

70

60

50

40

30

20

10

Quantity of Output(cookies per hour)

0 20 40 1401201008060

Total-costcurve

The Various Measures of Cost

Costs of production may be divided into fixed costs and variable costs.

Fixed and Variable Costs

Fixed costs are those costs that do not vary with the quantity of output produced.

Variable costs are those costs that do change as the firm alters the quantity of output produced.

Family of Total Costs

Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC)

TC = TFC + TVC

Family of Total CostsQuantity Total Cost Fixed Cost Variable Cost

0 $ 3.00 $3.00 $ 0.001 3.30 3.00 0.302 3.80 3.00 0.803 4.50 3.00 1.504 5.40 3.00 2.405 6.50 3.00 3.506 7.80 3.00 4.807 9.30 3.00 6.308 11.00 3.00 8.009 12.90 3.00 9.90

10 15.00 3.00 12.00

Average Costs

Average costs can be determined by dividing the firm’s costs by the quantity of output produced.

The average cost is the cost of each typical unit of product.

Family of Average Costs

Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC)

ATC = AFC + AVC

Family of Average Costs

AFC=Fixed costQuantity

=FCQ

AVC=Variable cost

Quantity=

VCQ

ATC=Total costQuantity

=TCQ

AFC=Fixed costQuantity

=FCQ

AVC=Variable cost

Quantity=

VCQ

ATC=Total costQuantity

=TCQ