Tuesday Objective: 3.3 SWBAT analyze the behavior of per-unit and total cost curves. AY: Problem Set #3 due Thursday Do Now: Calculate the Marginal Product and identify the 3 Stages of Return on the table below: After which worker does this firm start to have diminishing marginal returns? After which worker does this firm start to have negative marginal returns? # of Workers Total Product Marginal Product   1 5 2 15 3 19 4 20 6

Do Now Calculate the Marginal Product and identify the 3 Stages of Return on the table below: Purple-Increasing Marginal returns Aqua-Decreasing marginal returns Purple-negative marginal returns After which worker does this firm start to have diminishing marginal returns? After the 2nd worker, at the 3rd worker After which worker does this firm start to have negative marginal returns? Starts to have negative marginal returns with the 6th worker # of Workers Total Product Marginal Product  0 1 5  5 2 15  10 3 19  4 4 20  1 6  -1

Agenda Do Now 3.3 Cost of Production Practice

Production = Converting inputs into output

Definition of the “Short-Run” We will look at both short-run and long-run production costs. Short-run is NOT a set specific amount of time. The short-run is a period in which at least one resource is fixed. Plant capacity/size is NOT changeable In the long-run ALL resources are variable NO fixed resources Plant capacity/size is changeable Today we will examine short-run costs 5

Different Economic Costs Total Costs FC = Total Fixed Costs VC = Total Variable Costs TC = Total Costs Per Unit Costs AFC = Average Fixed Costs AVC = Average Variable Costs ATC = Average Total Costs MC = Marginal Cost

Fixed vs. Variable (Review) Fixed Resources- Resources that don’t change with the quantity produced Ex: Table, scissors, and stapler Variable Resources- Resources that do change with the quantity produced Ex: Workers, paper, and staples Identify three fixed resources and three variable resources for the link simulation we did in class. 7

Definitions Fixed Costs: Variable Costs: Costs for fixed resources that DON’T change with the amount produced Ex: Rent, Insurance, Managers Salaries, etc. Average Fixed Costs = Fixed Costs Quantity Variable Costs: Costs for variable resources that DO change as more or less is produced Ex: Raw Materials, Labor, Electricity, etc. Average Variable Costs = Variable Costs Quantity

Definitions Total Cost: Marginal Cost: Sum of Fixed and Variable Costs Average Total Cost = Total Costs Quantity Marginal Cost: Additional costs of an additional output. Ex: If the production of two more output increases total cost from $100 to $120, the MC is _____. $10 Marginal Cost = Change in Total Costs Change in Quantity

Calculating Costs $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 - Output Variable Cost Fixed Total Marginal $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 - $20 $5 $10 $12 $2 $14

Calculating Costs ATC of 6 Units AFC of 2 Units AVC of 4 Units Output Variable Cost Fixed Total Marginal $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 Fill out the chart then calculate: ATC of 6 Units AFC of 2 Units AVC of 4 Units ATC of 1 Unit AVC of 5 Units AFC of 5 Units ATC of 5 Units $10 $10 $20 $27 $35 $50 $70 $120 - $10 $7 $8 $15 $20 $50 $20 $5 $10 $12 $2 $14

Calculating Costs Notice that the AVC + AFC = ATC AVC AFC ATC Output Variable Cost Fixed Total Marginal $0 $10 - 1 $20 2 $17 $27 $7 3 $25 $35 $8 4 $40 $50 $15 5 $60 $70 6 $110 $120 AVC AFC ATC - $20 $5 $10 $12 $2 $14 Notice that the AVC + AFC = ATC For 5 Units: AVC ($12) + AFC ($2) = ATC ($14) Is this is true for 4 Units?

Calculating Costs Notice that the AVC + AFC = ATC AVC AFC ATC Output Variable Cost Fixed Total Marginal $0 $10 - 1 $20 2 $17 $27 $7 3 $25 $35 $8 4 $40 $50 $15 5 $60 $70 6 $110 $120 AVC AFC ATC - $10 $20 $8.50 $5 $13.50 $8.33 $3.33 $11.66 $2.50 $12.50 $12 $2 $14 $18.33 $1.67 $20 $5 $10 $12 $2 $14 Notice that the AVC + AFC = ATC For 5 Units: AVC ($12) + AFC ($2) = ATC ($14) Is this is true for 4 Units?

Calculating Costs ATC of 6 Units: $20 AFC of 2 Units: $5 Output Variable Cost Fixed Total Marginal $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 Fill out the chart then calculate: ATC of 6 Units: $20 AFC of 2 Units: $5 AVC of 4 Units: $10 ATC of 1 Unit: $20 AVC of 5 Units: $12 AFC of 5 Units: $2 ATC of 5 Units: $14 $10 $10 $20 $27 $35 $50 $70 $120 - $10 $7 $8 $15 $20 $50 $20 $5 $10 $12 $2 $14

Total Cost Curves TC Costs FC + VC = TC VC Fixed Cost $10 FC Quantity

Calculating Costs AVC AFC ATC - $10 $20 $8.50 $5 $13.50 $8.33 $3.33 $11.66 $2.50 $12.50 $12 $2 $14 $18.33 $1.67 $20 $5 $10 $12 $2 $14

ATC and AVC get closer and closer but NEVER touch MC Costs ATC $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 AVC ATC and AVC get closer and closer but NEVER touch Average Fixed Cost AFC 1 2 3 4 5 6 Quantity Copyright ACDC Leadership 2015

Practice 18

Calculating Costs $0 $20 - 1 $12 2 $22 3 $27 4 $40 5 $60 6 $100 Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 2 $22 3 $27 4 $40 5 $60 6 $100 8. ATC of 6 units: 9. AFC of 2 units: 10. AVC of 3 units: 11. ATC of 5 units: 12. AVC of 2 units: 13. AVC of 4 units: 14. AFC of 4 units: 15. ATC of 4 units: $20 $5 $10 $12 $2 $14

Calculating Costs $0 $20 - 1 $12 $32 2 $22 $42 3 $27 $47 4 $40 $60 5 Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 $32 2 $22 $42 3 $27 $47 4 $40 $60 5 $80 6 $100 $120 8. ATC of 6 units: 9. AFC of 2 units: 10. AVC of 3 units: 11. ATC of 5 units: 12. AVC of 2 units: 13. AVC of 4 units: 14. AFC of 4 units: 15. ATC of 4 units: $20 $5 $10 $12 $2 $14

Calculating Costs $0 $20 - 1 $12 $32 2 $22 $42 $10 3 $27 $47 $5 4 $40 Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 $32 2 $22 $42 $10 3 $27 $47 $5 4 $40 $60 $13 5 $80 6 $100 $120 8. ATC of 6 units: 9. AFC of 2 units: 10. AVC of 3 units: 11. ATC of 5 units: 12. AVC of 2 units: 13. AVC of 4 units: 14. AFC of 4 units: 15. ATC of 4 units: $20 $5 $10 $12 $2 $14

Calculating Costs $0 $20 - 1 $12 $32 2 $22 $42 $10 3 $27 $47 $5 4 $40 Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 $32 2 $22 $42 $10 3 $27 $47 $5 4 $40 $60 $13 5 $80 6 $100 $120 8. ATC of 6 units: $20 9. AFC of 2 units: $10 10. AVC of 3 units: $9 11. ATC of 5 units: $16 12. AVC of 2 units: $11 13. AVC of 4 units: $10 14. AFC of 4 units: $5 15. ATC of 4 units: $15 $20 $5 $10 $12 $2 $14

Wednesday Obj. 3.4 Shapes of Cost Curves SWBAT analyze the relationship between the marginal cost curve and the marginal product curve. AY: Update notebook. Graphs Chart and Notecard due 3/18 *Summative* Due Tomorrow: Problem Set #3 Do Now: Draw a Supply and Demand graph that shows the market for grain and how it is affected by an excise tax imposed on production. What happens to price and quantity? Now draw the market for tortillas if grain is an input of tortillas. What happens to P and Q?

Agenda Do Now 3.4 Shapes of Cost Curves Practice Problem Set #3

Use the formulas to complete the table TP VC FC TC MC AVC AFC ATC 100 1 10 2 16 3 21 4 26 5 30 6 36 7 46 2nd period

Calculating TC, VC, FC, ATC, AFC, and MC TP VC FC TC MC AVC AFC ATC 100 1 10 2 16 3 21 4 26 5 30 6 36 7 46 6th period

Calculating TC, VC, FC, ATC, AFC, and MC TP VC FC TC MC AVC AFC ATC 100 1 10 110 2 16 116 3 21 121 4 26 126 5 30 130 6 36 136 7 46 146

Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 3 21 100 - 1 10 110 2 16 116 3 21 121 4 26 126 5 30 130 6 36 136 7 46 146

Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 3 100 - 1 10 110 2 16 116 6 3 21 121 5 4 26 126 30 130 36 136 7 46 146

Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 100 - 1 10 110 2 16 116 6 8 3 21 121 5 7 4 26 126 6.5 30 130 36 136 46 146 6.6

Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 100 - 1 10 110 2 16 116 6 8 50 3 21 121 5 7 33.3 4 26 126 6.5 25 30 130 20 36 136 16.67 46 146 6.6 14.3 Asymptote

Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 40.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9

Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 40.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9

Calculate TC, VC, and FC of the 5th Unit Curve D Costs Curve C $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 Curve B Calculate TC, VC, and FC of the 5th Unit 1st period TC= $70 VC= $60 TC = $10 Curve A 1 2 3 4 5 6 Quantity

1 2 3 4 5 6 Costs TC=$14 x 5 TC=$70 MC ATC AVC AFC Quantity $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 AVC TC=$14 x 5 TC=$70 TC= $70 VC= $60 TC = $10 AFC 1 2 3 4 5 6 Quantity

1 2 3 4 5 6 Costs VC=$12 x 5 VC=$60 MC ATC AVC AFC Quantity $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 AVC VC=$12 x 5 VC=$60 TC= $70 VC= $60 TC = $10 AFC 1 2 3 4 5 6 Quantity

1 2 3 4 5 6 Costs FC=$5 x 2 FC=$10 MC ATC AVC AFC Quantity $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 AVC FC=$5 x 2 FC=$10 TC= $70 VC= $60 TC = $10 AFC 1 2 3 4 5 6 Quantity

How much does the 10th unit costs? MC $30 25 20 15 10 5 ATC AVC Calculate TC, VC, and FC Total Cost=$200 Variable Cost=$150 Fixed Cost=$50 Notice that VC + FC = TC AFC 7 8 9 10 11 Quantity

How much does the 10th unit costs? MC $30 25 20 15 10 5 ATC AVC Calculate TC, VC, and FC Total Cost=$200 Variable Cost=$150 Fixed Cost=$50 Notice that VC + FC = TC AFC 7 8 9 10 11 Quantity

How much does the 10th unit costs? MC $30 25 20 15 10 5 ATC AVC Remember the vertical distance between ATC and AVC is AFC Total Cost=$200 Variable Cost=$150 Fixed Cost=$50 Notice that VC + FC = TC AFC 7 8 9 10 11 Quantity

Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC 0CDQ 0BEQ 0AFQ or BCDE

Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC 0CDQ 0BEQ 0AFQ or BCDE

Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC 0CDQ 0BEQ 0AFQ or BCDE

Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC 0CDQ 0BEQ 0AFQ or BCDE

Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC 0CDQ 0BEQ 0AFQ or BCDE

Objective 3.4 Shapes of Cost Curves

Why does marginal cost always go down then up? MC Costs Quantity

MP and MC are mirror images of each other Relationship between Production and Cost Output As more workers are hired, their marginal product increases and then eventually decreases because of the law of diminishing marginal returns MP The additional costs (MC) of the units they produce fall when MP goes up, but eventually increase as additional workers produce less and less output MP and MC are mirror images of each other Quantity of labor Costs MC Quantity of output

Why is the MC curve U-shaped? The MC curve falls and then rises because of diminishing marginal returns. Example: Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10) Workers Total Prod Marg Prod Total Cost Marginal Cost 1 5 2 13 3 19 4 23 25 6 26

Why is the MC curve U-shaped? The MC curve falls and then rises because of diminishing marginal returns. Example: Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10) Workers Total Prod Marg Prod Total Cost Marginal Cost - 1 5 2 13 8 3 19 6 4 23 25 26

Why is the MC curve U-shaped? The MC curve falls and then rises because of diminishing marginal returns. Example: Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10) Workers Total Prod Marg Prod Total Cost Marginal Cost - $20 1 5 $30 2 13 8 $40 3 19 6 $50 4 23 $60 25 $70 26 $80

Why is the MC curve U-shaped? The MC curve falls and then rises because of diminishing marginal returns. Example: Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10) Workers Total Prod Marg Prod Total Cost Marginal Cost - $20 1 5 $30 10/5 = $2 2 13 8 $40 10/8 = $1.25 3 19 6 $50 10/6 = $1.6 4 23 $60 10/4 = $2.5 25 $70 10/2 = $5 26 $80 10/1 = $10

Why is the MC curve U-shaped? The additional cost of the first 13 units produced falls because workers have increasing marginal returns. As production continues, each worker adds less and less to production so the marginal cost for each unit increases. Workers Total Prod Marg Prod Total Cost Marginal Cost - $20 1 5 $30 10/5 = $2 2 13 8 $40 10/8 = $1.25 3 19 6 $50 10/6 = $1.6 4 23 $60 10/4 = $2.5 25 $70 10/2 = $5 26 $80 10/1 = $10

MC Costs ATC Quantity

Relationship between Production and Cost MC Costs MC Why does ATC go down then up? When the marginal cost is below the average, it pulls the average down. When the marginal cost is above the average, it pulls the average up. ATC Quantity MC intersects the ATC curve at ATC’s lowest point 1st period Example: The average income in the room is $50,000. An additional (marginal) person enters the room: Bill Gates. If the marginal is greater than the average it pulls it up. Notice that MC can increase but still pull down the average.

Thursday Objective: 3.5 SWBAT describe the profit-maximizing output for any firm AY: Update your notebook daily. Graphs Chart and Notecard due 3/18 *Summative* Do Now:   Identify the 3 Stages of Return in the table above. In stage 1, why does marginal product increase? In stage 2, why does marginal product decrease? # of Workers Total Product Marginal Product  - 1 7   2 17 3 21 4 5 18 6 14

Agenda Finish 3.4 notes Problem Set #3 Parts I and II

Additional Practice

When in doubt, graph it out MC Costs ATC $12 $10 $8 $2 AVC AFC 100 Quantity

2010 Question 18 B

2008 Audit Question 23 23. C

50. c

1. A C 2.

1. 2. E D

7.D

Shifting Cost Curves

What if Fixed Costs increase to $200 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 30.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9 What if Fixed Costs increase to $200

Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 30.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9

Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 200 100 - 1 10 110 2 200 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 30.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9

Which Per Unit Cost Curves Change? Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 200 - 1 10 210 100 110 2 16 216 6 8 50 58 3 21 221 5 7 33.3 30.3 4 26 226 6.5 25 31.5 30 230 20 36 236 16.67 22.67 46 246 6.6 14.3 20.9 Which Per Unit Cost Curves Change?

ONLY AFC and ATC Increase! Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 200 - 1 10 210 100 110 2 16 216 6 8 50 58 3 21 221 5 7 33.3 30.3 4 26 226 6.5 25 31.5 30 230 20 36 236 16.67 22.67 46 246 6.6 14.3 20.9 ONLY AFC and ATC Increase!

ONLY AFC and ATC Increase! Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 200 - 1 10 210 110 2 16 216 6 8 100 58 3 21 221 5 7 66.6 30.3 4 26 226 6.5 50 31.5 30 230 40 36 236 33.3 22.67 46 246 6.6 28.6 20.9 ONLY AFC and ATC Increase!

If fixed costs change ONLY AFC and ATC Change! Shifting Costs Curves If fixed costs change ONLY AFC and ATC Change! TP VC FC TC MC AVC AFC ATC 200 - 1 10 210 2 16 216 6 8 100 108 3 21 221 5 7 66.6 73.6 4 26 226 6.5 50 56.5 30 230 40 46 36 236 33.3 39.3 246 6.6 28.6 35.2 MC and AVC DON’T change!

Shift from an increase in a Fixed Cost MC ATC1 ATC AVC Costs (dollars) AFC1 AFC Quantity

Shift from an increase in a Fixed Cost MC ATC1 AVC Costs (dollars) AFC1 Quantity

What if the cost for variable resources increase Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 30.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9 What if the cost for variable resources increase

Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 100 - 1 10 110 2 16 116 6 8 50 58 3 21 121 5 7 33.3 30.3 4 26 126 6.5 25 31.5 30 130 20 36 136 16.67 22.67 46 146 6.6 14.3 20.9

Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 110 10 2 100 - 1 11 110 10 2 18 116 6 8 50 58 3 24 121 5 7 33.3 30.3 4 30 126 6.5 25 31.5 35 130 20 26 43 136 16.67 22.67 55 146 6.6 14.3 20.9

Which Per Unit Cost Curves Change? Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 111 10 110 2 18 118 6 8 50 58 3 24 124 5 7 33.3 30.3 4 30 130 6.5 25 31.5 35 135 20 26 43 143 16.67 22.67 55 155 6.6 14.3 20.9 Which Per Unit Cost Curves Change?

Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 111 10 110 100 - 1 11 111 10 110 2 18 118 7 8 50 58 3 24 124 6 33.3 30.3 4 30 130 6.5 25 31.5 5 35 135 20 26 43 143 16.67 22.67 55 155 12 6.6 14.3 20.9 MC, AVC, and ATC Change!

Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 111 110 2 100 - 1 11 111 110 2 18 118 7 9 50 58 3 24 124 6 8 33.3 30.3 4 30 130 7.5 25 31.5 5 35 135 20 26 43 143 7.16 16.67 22.67 55 155 12 7.8 14.3 20.9 MC, AVC, and ATC Change!

If variable costs change MC, AVC, and ATC Change! Shifting Costs Curves If variable costs change MC, AVC, and ATC Change! TP VC FC TC MC AVC AFC ATC 100 - 1 11 111 2 18 118 7 9 50 59 3 24 124 6 8 33.3 41.3 4 30 130 7.5 25 32.5 5 35 135 20 27 43 143 7.16 16.67 23.83 55 155 12 7.8 14.3 22.1

Shift from an increase in a Variable Costs MC1 MC ATC1 AVC1 ATC AVC Costs (dollars) AFC Quantity

Shift from an increase in a Variable Costs MC1 ATC1 AVC1 Costs (dollars) AFC Quantity

Friday Objective: 3.5 SWBAT describe the profit-maximizing output for any firm AY: Update your notebook daily. Problem Set #3 Parts III and IV due Monday. Graphs Chart and Notecard due 3/18 *Summative*

Agenda Do Now 3.5 Profit maximizing Weekly Assessment

Unit 3: Costs of Production and Perfect Competition Objective 3 Unit 3: Costs of Production and Perfect Competition Objective 3.5 Maximizing Profit 1st period/go over Problem Set #3

Production = Converting inputs into output

Maximizing PROFIT! 89

Short-Run Profit Maximization What is the goal of every business? To Maximize Profit!!!!!! To maximize profit firms must make the right output Firms should continue to produce until the additional revenue from each new output equals the additional cost. Example (Assume the price is $10) Should you produce… …if the additional cost of another unit is $5 …if the additional cost of another unit is $9 …if the additional cost of another unit is $11 90

Profit Maximizing Rule Short-Run Profit Maximization MR=MC Short-Run Profit Maximization What is the goal of every business? To Maximize Profit!!!!!! To maximum profit firms must make the right output Firms should continue to produce until the additional revenue from each new output equals the additional cost. Example (Assume the price is $10) Should you produce… …if the additional cost of another unit is $5 …if the additional cost of another unit is $9 …if the additional cost of another unit is $11 91

Bevo’s PJs 1. Fill in the table 2. Answer questions #1 through 6 3. Graph MR and MC Corrections: Output 5- VC is 60 AVC is 12 ATC is 16 4. Answer the two questions on page two of the notes.

Maximizing Profit Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 2 $22 3 $27 4 $40 5 $60 6 $100 TR MR Profit - $30 -$2 $60 $18 $90 $43 $120 $150 $70 $180 5 Units $150 Total Revenue ($30 x 5) $70 Profit ($150 - $80) Notice that at 6 units the firm is still making profit. It’s just not maximizing profit

Maximizing Profit Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 2 $22 3 $27 4 $40 5 $60 6 $100 TR MR Profit - $30 -$2 $60 $18 $90 $43 $120 $150 $70 $180 5 Units $150 Total Revenue ($30 x 5) $70 Profit ($150 - $80) Notice that at 6 units the firm is still making profit. It’s just not maximizing profit

Assume every unit can be sold for $10. Which unit maximizes profit Assume every unit can be sold for $10. Which unit maximizes profit? 4 units because MR=MC Use marginal analysis to explain why you should never produce 5 units. At 5 units the MC is greater than the MR. Marginal Cost Price $12 $10 $8 $6 Marginal Revenue Quantity 1 2 3 4 5

Definition of the “Short-Run” We will look at both short-run and long-run production costs. Short-run is NOT a set specific amount of time. The short-run is a period in which at least one resource is fixed. Plant capacity/size is NOT changeable In the long-run ALL resources are variable NO fixed resources Plant capacity/size is changeable Today we will examine LONG-run costs. 96

Definition and Purpose of the Long Run In the long run ALL resources are variable. Plant capacity/size can change. Why is this important? The Long-Run is used for planning. Firms use to identify which plant size results in the lowest per unit cost. IDEA New York??

There are only three possible outcomes: Ex: Assume a firm is producing 100 hotdogs with a fixed number of resources (workers, machines, etc.). If this firm decides to DOUBLE the number of resources, what will happen to the number of hotdogs it can produce? There are only three possible outcomes: Hotdogs will more than double (increasing returns to scale) Hotdogs will double (constant returns to scale) Hotdogs will less than double (decreasing returns to scale)

Between the two firms, who has the lowest per-unit cost? How It’s Made Between the two firms, who has the lowest per-unit cost? Watch this video: This video highlights how large firms use mass production techniques (Townsend 2400 machine) and specialization in order to increase their output and decrease their per unit costs.

Long Run ATC What happens to the average total costs of a product when a firm increases its plant capacity? Example of various plant sizes: I make chairs out of my garage with one saw I rent out building, buy 5 saws, hire 3 workers I rent a factory, buy 20 saws and hire 40 workers I build my own plant and use robots to build chairs. I create plants in every major city in the U.S. Long Run ATC curve is made up of all the different short run ATC curves of various plant sizes. 101

Long Run AVERAGE Total Cost Costs MC1 ATC1 $9,900,000 $50,000 $6,000 $3,000 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 102

Long Run AVERAGE Total Cost Economies of Scale- Long Run Average Cost falls because mass production techniques are used. Costs MC1 ATC1 MC2 $9,900,000 ATC2 $50,000 $6,000 $3,000 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 103

Long Run AVERAGE Total Cost Economies of Scale- Long Run Average Cost falls because mass production techniques are used. Costs MC1 ATC1 MC2 $9,900,000 MC3 ATC2 $50,000 ATC3 $6,000 $3,000 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 104

ECONOMIES OF SCALE Why does economies of scale occur? Firms that produce more can better use Mass Production Techniques and Specialization. Example: A car company that makes 50 cars will have a very high average cost per car. A car company that can produce 100,000 cars will have a low average cost per car. Using mass production techniques, like robots, will cause total cost to be higher but the average cost for each car would be significantly lower. 105

Economies of Scale is the idea that: Getting bigger is cheaper!

Long Run AVERAGE Total Cost Constant Returns to Scale- The long-run average total cost is as low as it can get. Costs MC1 ATC1 MC2 $9,900,000 MC3 MC4 ATC2 $50,000 ATC3 ATC4 $6,000 $3,000 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 107

Long Run AVERAGE Total Cost Diseconomies of Scale- Long run average costs increase as the firm gets too big and difficult to manage. Costs MC1 ATC1 MC2 $9,900,000 MC5 MC3 ATC5 MC4 ATC2 $50,000 ATC3 ATC4 $6,000 $3,000 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 108

Long Run AVERAGE Total Cost These are all short run average costs curves. Where is the Long Run Average Cost Curve? Costs MC1 ATC1 MC2 $9,900,000 MC5 MC3 ATC5 MC4 ATC2 $50,000 ATC3 ATC4 $6,000 $3,000 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 109

Long Run AVERAGE Total Cost Costs Economies of Scale Constant Returns to Scale Diseconomies of Scale Long Run Average Cost Curve 0 1 100 1,000 100,000 1,000,0000 Quantity Cars 110

Constant Returns to Scale Long Run Average Cost Curve LRATC Simplified The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES. Costs Economies of Scale Constant Returns to Scale Diseconomies of Scale Long Run Average Cost Curve Quantity 111

Think About It! What is the difference between the short-run and the long-run? Why does a firm use mass production techniques in order to increase its output?

Think About It! What is the difference between the short-run and the long-run? The short-run is defined as period in which a firm has at least on fixed resource. The long-run is defined a period in which all resources are variable and helps firms plan for future growth. Why does a firm use mass production techniques in order to increase its output? A firm uses mass production techniques in order to decrease their products’ per-unit cost. A lower per-unit cost implies a lower price to attract consumers.

2010 Question 19

Long Run Production Practice Multiple Choice questions