Transcript Slide 1

Al’s Sub Shop
Al and Dale’s Sub Station
Subway
Liability
Sharing
Limited? Knowledge?
Number of Unlimited? Financing?
Owners
Profits?
___ proprietorship______ ______
___
partnership ______
______
___
corporation ______
______
Number Receipts
proprietorship
partnership
corporation
8
20
72
10
5
85
explicit
implicit
total
economic
normal
accounting
Total Fixed Costs rent
Do not change with output
bourbon
Total DoVariable
Costs
scotch beer
change with output
Total Costs = TFC + TVC
Long Run
The factory size can
change
Short Run:
Factors like labor
and raw materials can be changed
Average Fixed Costs
Average Variable Costs
Average Total Costs = ?+?
Marginal Cost
Change in cost with 1 more output
Do change with output
Do not change with output
Marcia Deal
bakes and
decorates large, elaborate, multilayered, special occasion cakes.
She produces these in her own home
without any help, unless she has a large
number of orders on a particular day.
With the following information, complete the table
The total cost of producing 5 cakes is $135
Marcia’s total fixed cost for 1 cake is $25
The marginal cost for the 8th cake is $91
The ATC per cake when 3 cakes or
when 4 cakes are made is $25
The total variable cost of producing 7 cakes is $220
The marginal cost of the 6th cake is $45
The total cost of 2 cakes is $60
The total variable cost for 1 cake is $25
Why is the Marginal Cost of the
7th and 8th cakes fairly high?
Number
of Cakes
0
1
2
3
4
5
6
7
8
Total
Total Fixed
Average
Total Cost
Variable
Cost
Total Cost
Cost
Marginal
Cost
Average Total Cost and Marginal Cost
$120
110
100
90
80
70
60
50
40
30
20
10
0
1
2
3
4
5
6
Number of Cakes
7
8
If Marcia can sell from 0 - 8 cakes at
$40 each, how many will she choose to
produce and sell per day if she is trying
to maximize her profits??
Complete the table to check
Do the numbers in the Total Profit
column and in the Marginal Revenue and
Marginal Cost columns support that?
Number
of Cakes
0
1
2
3
4
5
6
7
8
Total
Revenue
Total Cost
Total
Profit
Marginal
Revenue
Marginal
Cost
On the graph, plot the total cost of
producing from 0 – 8 cakes.
Use the data from the table
On the second graph, plot the
average total cost and marginal cost
of producing from 0 – 8 cakes.
Plot the marginal cost at the midpoints
Why does total cost exhibit this pattern
in this exercise?
$350
Total Cost
300
250
200
150
100
50
0
1
2
3
4
5
6
Number of Cakes
7
8
Output
0
1
2
3
4
5
6
7
8
9
10
TFC
100
___
100
___
100
___
100
___
100
___
100
100
___
100
___
100
___
___
100
___
100
TVC
0
50
90
120
160
220
300
400
520
670
900
TC
100
150
___
___
190
___
220
___
260
320
___
400
___
500
___
620
___
770
___
___
1000
Output
0
1
1
2
2
3
3
4
4
5
5
6
7
8
9
9
10
10
AFC
(TFC/output)
AVC
(TVC/output)
ATC
(TC/output)
50
150
________
________
________
100
45
95
____________
____________
____________
50
40
73
____________
____________
____________
33
40
65
____________
____________
____________
25
44
64
____________
____________
____________
20
50
67
17
____________
____________
____________
59
73
14
____________
____________
____________
65
____________
____________
11
74
____________
78
____________
____________
10
90
____________
100
____________
12
____________
85
____________
MC
(TC1-TC0)
50
_____
40
_______
30
_______
40
_______
60
_______
80
_______
100
_______
120
_______
150
_______
230
_______
900
Cost 800
700
600
Total Cost
500
400
Total Variable
Cost
Total Fixed Cost
300
200
100
0
1
2
3
4
5
6
7
8
9
10
Output
90
Cost
80
70
60
and
50
40
30
20
Graphed
10
0
1
2
3
4
5
6
7
8
9
10
Output
Gets more efficient Efficient Range
as size increases
of Production
Gets less efficient
as size increases
LRAC
600,000
Economies
of Scale
500,000
400,000
Diseconomies
of Scale
300,000
200,000
Constant Returns
to Scale
100,000
0
1
2
3
4
5
6
7
8
9
10
Houses Built
Economies of Scale
More efficient as size increases
Diseconomies of Scale
Less efficient as size increases
Constant Returns to Scale
Efficient Range of Production
The recipe: going from inputs
to outputs
Efficient Production
The least cost combination of inputs.
It varies by firm
The Law of Diminishing
Returns
In the beginning, output increases with
each unit added, but at some point
output will begin to decrease with each
additional unit of a resource.
Like Labor
ATC curve goes down as efficiency
increases
Then begins to go up
Data:
Labor
0
1
2
3
4
5
6
Output
Total Marginal Average
0
3
8
12
15
17
18
3
___
___
5
___
4
3
___
2
___
1
___
___
3
___
4
4
___
3.75
___
3.4
___
3
___
Total Output
Output
18
15
12
9
6
3
0
1
2
3
4
5
6
Quantity of Labor
Average and Marginal
Output
6
5
4
3
2
1
0
1
2
3
4
5
6
Quantity of Labor
1. Which of the following is most likely to be an implicit cost of
production?
a. property taxes on a building owned by the firm
b. transportation costs paid to a trucking supplier
c. rental payments for a building utilized by the company and rented from
another party
d. interest income foregone on funds invested in the firm by the owners
2. The law of diminishing returns
a. explains why marginal cost eventually increases as output expands.
b. implies that average fixed cost will remain unchanged as output expands.
c. is true for physical production activities but not for activities such as studying.
d. applies to a capitalist economy but would be irrelevant if the means of
production were owned by the state.
3. Which of the following represents a long-run adjustment?
a. the hiring of four additional cashiers by a supermarket
b. a cutback on purchases of coke and iron ore by a steel manufacturer
c. construction of a new assembly-line plant by a car manufacturer
d. the extra dose of fertilizer used by a farmer on his wheat crop
4. The short-run average total cost (ATC) curve of a firm is U-shaped because
a. larger firms always have lower per-unit costs than smaller firms.
b. at low levels of output, AFC will be high, while at high levels of output, MC will be
high as the result of diminishing returns.
c. diminishing returns will be present when output is small, and high AFC will push
per-unit cost to high levels when output is large.
d. diseconomies of scale will be present at both small and large output rates.
5. When costs that vary with the level of output are divided by the output, you
have calculated
a. total changing cost.
b.
total fixed cost.
c. average fixed cost.
d.
average variable cost.
6. A downward-sloping portion of a LR average total cost curve is the result of
a. economies of scale.
b.
diseconomies of scale.
c. diminishing returns.
d.
the existence of fixed resources.
7. In the short run, if average variable cost equals $50, average total cost equals
$75, and output equals 100, the total fixed cost must be
a. $25.
b. $2,500.
c. $5,000.
d.
$7,500.
At what output in the graph would the
firm’s per-unit cost of production be
minimized?
b. 4
a. 3
c. 5
d. 6
What is the firm’s approximate total
cost when it produces three units?
c. 48
a. 10
b. 16
d. 60
What is the firm’s total cost when it produces four units?
c. 60
a. 11
b. 15
d. 75
The average variable cost and average total cost
for a firm are indicated in the graph. If the
marginal cost curve were constructed, at what
output would it cross the AVC curve?
b. 15
a. 10
c. 20
d. 25
At what output should a the marginal
cost curve cross the ATC curve?
a. 15
b. 20
c. 25
d. 30