Transcript Chapter 9

Chapter 9
Businesses and the Costs of
Production
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Economic Costs
• The payment that must be made to obtain
and retain the services of a resource
• Explicit costs
• Monetary outlay
• Implicit costs
• Opportunity cost of using self-owned
resources
• Value of next-best use
• Includes a normal profit
LO1
9-2
Accounting Profit and Normal
Profit
• Accounting profit
= Total revenue – explicit costs
• Economic profit
= Accounting profit – implicit costs
• Economic profit (to summarize)
= Revenue – economic cost
= Revenue – explicit costs – implicit costs
LO1
9-3
Economic Profit
LO1
Implicit costs
(including a
normal profit)
Explicit
costs
Accounting profit
Total revenue
Economic
(opportunity)
costs
Economic
profit
Accounting costs
(explicit costs
only)
9-4
Short Run and Long Run
• Short run
• Some variable inputs
• Fixed plant
• Long run
• All inputs are variable
• Firms can adjust plant size as well as enter
and exit industry
LO2
9-5
Short Run Production
Relationships
• Total product (TP)
• Marginal product (MP)
Marginal product = change in total product
change in labor input
• Average product (AP)
Average product =
LO2
total product
units of labor
9-6
Law of Diminishing Returns
• Law of diminishing returns
• Resources are of equal quality
• Technology is fixed
• Variable resources are added to fixed
resources
• At some point, marginal product will fall
• Rationale
LO2
9-7
The Law of Diminishing Returns
Total, Marginal, and Average Product: The Law of Diminishing Returns
(3)
Marginal Product
(MP)
Change in (2)/
Change in (1)
(1)
Units of the Variable
Resource (Labor)
(2)
Total Product (TP)
0
0
1
10
10
2
25
15
3
45
20
4
60
15
5
70
10
6
75
5
7
75
0
8
70
-5
(4)
Average Product
(AP),
(2)/(1)
Increasing
marginal
returns
10.00
12.50
15.00
15.00
Diminishing
marginal
returns
14.00
12.50
10.71
Negative
marginal
returns
8.75
7-8
9-8
Total product, TP
The Law of Diminishing Returns
30
TP
20
10
0
Marginal product, MP
1
LO2
20
2
3
Increasing
Marginal
Returns
4
5
6
7
8
9
Negative
Marginal
Returns
Diminishing
Marginal
Returns
10
AP
1
2
3
4
5
6
7
8
9
MP
9-9
Short Run Production Costs
• Fixed costs (TFC)
• Costs that do not vary with output
• Variable costs (TVC)
• Costs that do vary with output
• Total cost (TC)
• Sum of TFC and TVC
• TC = TFC + TVC
LO3
9-10
Short-Run Production Costs
$1100
TC
1000
900
TVC
800
Costs
700
600
Fixed
cost
500
400
Total
cost
300
200
Variable
cost
100
TFC
0
LO3
1
2
3
4
5
6
7
8
9
10
Q
9-11
Per-Unit, or Average, Costs
•
•
•
•
LO3
Average fixed cost
Average variable cost
Average total cost
Marginal cost
AFC = TFC/Q
AVC = TVC/Q
ATC = TC/Q
MC = ΔTC/ΔQ
9-12
Short-Run Production Costs
Total, Average, and Marginal Cost Schedules for an Individual Firm in the Short Run
Total Cost Data
Average Cost Data
Marginal Cost
(5)
Average Fixed
Cost
(AFC)
AFC = TFC/Q
(6)
Average
Variable
Cost
(AVC)
AVC=TVC/Q
(7)
Average Total
Cost
(ATC)
ATC = TC/Q
(8)
Marginal Cost
(MC)
MC =ΔTC/ΔQ
(1)
Total Product
(Q)
(2)
Total Fixed Cost
(TFC)
(3)
Total Variable
Cost
(TVC)
0
$100
$0
$100
90
190
$100.00
$90.00
$190.00
$90
1
(4)
Total Cost (TC)
TC=TFC+TVC
100
2
100
170
270
50.00
85.00
135.00
80
3
100
240
340
33.33
80.00
113.33
70
4
100
300
400
25.00
75.00
100.00
60
5
100
370
470
20.00
74.00
94.00
70
6
100
450
550
16.67
75.00
91.67
80
7
100
540
640
14.29
77.14
91.43
90
8
100
650
750
12.50
81.25
93.75
110
9
100
780
880
11.11
86.67
97.78
130
10
100
930
1030
10.00
93.00
103.00
150
9-13
LO3
7-13
Per-Unit, or Average, Costs
$200
Costs
150
ATC
AVC
100
AFC
50
AVC
AFC
0
LO3
1
2
3
4
5
6
7
8
9
10
Q
9-14
Marginal Cost
$200
MC
Costs
150
ATC
AVC
100
AFC
50
AVC
AFC
0
LO3
1
2
3
4
5
6
7
8
9
10
Q
9-15
Average product and
marginal product
Marginal Cost and Marginal Product
AP
MP
Quantity of labor
AVC
Cost (dollars)
MC
Cost curves
LO3
Quantity of output
9-16
Long Run Production Costs
• The firm can change all input amounts,
including plant size
• All costs are variable in the long run
• Long run ATC
• Different short run ATCs
LO4
9-17
Average total costs
Firm Size and Costs
ATC-1
ATC-5
ATC-2
ATC-3
ATC-4
Output
LO4
9-18
Average total costs
The Long-Run Cost Curve
ATC-1
ATC-5
ATC-2
ATC-3
ATC-4
Long-run
ATC
Output
LO4
9-19
Economies of Scale
• Economies of scale
• Labor specialization
• Managerial specialization
• Efficient capital
• Other factors
• Constant returns to scale
LO4
9-20
Diseconomies of Scale
• Diseconomies of scale
• Control and coordination problems
• Communication problems
• Worker alienation
• Shirking
LO4
9-21
MES and Industry Structure
• Minimum efficient scale (MES)
• Lowest level of output at which long run
average costs are minimized
• Can determine the structure of the industry
• Natural monopoly
• Long run costs are minimized when one
firm produces the product
LO4
9-22
Average total costs
MES and Industry Structure
Constant returns
to scale
Economies
of scale
Diseconomies
of scale
Long-run
ATC
q1
q2
Output
LO5
9-23
Average total costs
MES and Industry Structure
Economies
of scale
Diseconomies
of scale
Long-run
ATC
Output
LO5
9-24
Average total costs
MES and Industry Structure
Economies
of scale
Diseconomies
of scale
Long-run
ATC
Output
LO5
9-25
Applications and Illustrations
•
•
•
•
•
LO5
Rising gasoline prices
Successful start-up firms
Verson stamping machine
The daily newspaper
Aircraft and concrete plants
9-26
3D Printers and Mass
Customization
•
•
•
•
First industrial revolution began in 1700s
Mass production led to mass affordability
Second industrial revolution began late 1800s
Mass sales were necessary to spread R&D
costs
• Third industrial revolution is beginning Now
• Affordable mass customization with zero
transportation costs
9-27