• • 1. Organize factors of production and/or 2. Produce goods and services and/or 3. Sell produced goods and services A

virtual firm

organizes production and subcontracts out all work Many of the organizational structures of business are being separated from the production process

explicit implicit (opportunity) total economic normal accounting

Long Run

The factory size can change

Short

Run: Factors like labor raw materials

• Long run and short run do not necessarily refer to specific periods of time, but to the flexibility the firm has in changing the level of output

The recipe: going from inputs to outputs

Efficient Production

The least cost combination of inputs.

It varies by firm

Data: Output

Labor Total Marginal Average 0 1 2 3 4 5 6 0 3 8 12 15 17 18 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Output

18 15 12 9 6 3

Total Output

0 1 2 3 4 5 6

Quantity of Labor

Output

6

Average and Marginal

5 4 3 2 1 0 1 2 3 4 5 6

Quantity of Labor

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

Data: Output

Labor Total Marginal Average 0 1 2 3 4 5 6 0 3 8 12 15 17 18 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Increasing marginal productivity Diminishing marginal productivity 3.75

Diminishing Absolute productivity

Total Fixed Costs

Do not change with output

Total Variable Costs

Do change with output rent bourbon scotch beer

Total Costs = TFC + TVC

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, multi layered, 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 8 th 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 6 th cake is $45 The total cost of 2 cakes is $60 The total variable cost for 1 cake is $25

# 0 1 2 3 4 5 6 7 8 TC TFC

Why is the Marginal Cost of the 7 th fairly high?

TVC ATC

and 8 th

MC

cakes

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??

On the graph, plot the average total cost and marginal cost of producing from 0 – 8 cakes.

Plot the marginal cost at the midpoints

$120 110 100 90 80 70 60 50 40 30 20 10 0 Graph Marcia’s ATC, MC and MR

1 2 3 4 5 6 7 8 Number of Cakes

$120 110 100 90 80 70 60 50 40 30 20 10 0 Graph Marcia’s ATC, MC and MR

1 2 3 4 5 6 7 8 Number of Cakes

Number of Cakes 0 1 2 7 8 3 4 5 6 Total Revenue Total Cost Total Profit Marginal Revenue Marginal Cost

$350 300 250 200 150 100 50 0

Graph Marcia’s TC, TFC and TVC

1 2 3 4 5 6 7 8 Number of Cakes

$350 300 250 200 150 100 50 0

Graph Marcia’s TC, TFC and TVC

1 2 3 4 5 6 7 8 Number of Cakes

Output TFC TVC TC 0 1 2 3 4 100 100 ___ 100 0 50 90 120 160 100 ___ ___ ___ 260 5 220 6 7 8 9 10 100 100 100 100 300 400 520 670 900 ___ ___ 620 770 1000

Output AFC AVC ATC 0 1 2 3 4 5 MC (TFC/output) 100 (TVC/output) 50 (TC/output) 150 50 40 30 ) 40 60 80 8 9 10 100 120 150 230

900

Cost

800 700 600 500 400 300 200 100 0

Total Cost Total Variable Cost Total Fixed Cost

1 2 3 4 5 6 7 8 9 10

Output

90

Cost

80 70 60 50 40 30 20 10 0 and

Graphed

1 2 3 4 5 6 7 8 9 10

Output

Costs per unit

The Relationship Between Marginal Productivity and Marginal Costs

MC AVC

If marginal productivity is rising, marginal costs are falling

Q Output per worker

If average productivity is falling, average costs are rising

AP of workers MP of workers Q

12-24

The Relationship Between Marginal Cost and Average Cost • If MC > ATC, then ATC is rising • If MC > AVC, then AVC is rising • If MC < ATC, then ATC is falling • If MC < AVC, then AVC is falling • If MC = AVC and MC = ATC, then AVC and ATC are at their minimum points 12-25

Costs per unit

The Relationship Between Marginal Cost and Average Cost

MC ATC AVC

The marginal cost curve goes through the minimum point of both the ATC and AVC curves

Q

12-26

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. 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.

a. 11

At what output in the graph would the firm’s per-unit cost of production be minimized?

a. 3 a. 10 b. 4 c. 5

What is the firm’s approximate total cost when it produces three units?

b. 16 What is the firm’s total cost when it produces four units?

b. 15 c. 60 c. 48 c. 60 d. 6 d. 60 d. 75 a. 15

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?

a. 10 b. 15 c. 20 d. 25

At what output should a the marginal cost curve cross the ATC curve?

b. 20 c. 25 d. 30