The Costs of Production (Chapter 21) HAPPY MARCH… ONE WEEK UNTIL SPRING BREAK>>>

ScoresheetSection: AP MICROECO 21 3rd Cycle-6wk- PR6 Quiz 1 Feb 4, 2013 % 100 Chapters 1-3 HW Outlines Feb 5, 2013 % 100 Unit 1 Exam Feb 8, 2013 % 100 Personal Business Project I Feb 10, 2013 % 100 Activities 9 & 13 Feb 18, 2013 % 100 Activity 14 Feb 18, 2013 % 100 Activity 2 Feb 18, 2013 % 100 Quiz 2 Feb 22, 2013 % 100 AP Economics Exam 2 Feb 26, 2013 % 100 Shadenfreude Project Feb 28, 2013 % B 84%85%100%80%70%84%100% 90%82.50%100% F 58%75%90%63%0%56%70%100%0%42%80% F 64%65%95%72%50%68%50%100%65%40%80% C 76%85%99%79%88%72%50%100%65%63.50%90% D 73%80%100%83%0%84%75%100%60%59%90% C 77%95% 87%61%80%50%100%65%63%100% F 65%80% 62%68%50%100%0%50%70% D 71%85%99%85% 68%60%100%0%53.50%70% A 92%100% 91%100%96%100% 90%91.50%100% D 71%88%90%80%70%80%50%100%83%47%85% B 81%100% 80%100%88%60%100%90%67%85% C 78%90%100%79%88%72%50%100%0%79%90% D 73%75%100%79%100%64%70%100%0%62.50%85% D 70%80%100%75%85%64%70%100%88%48%90% D 71%80% 83%60%84%80%100%0%63%70% F 67%60%80%78%0%88%100% 0%58%80% F 66%85%90%75%60%84%60%100%0%46%90% C 76%90% 76%88%80%75%100%0%70%85% F 63%105%0%79.75%0%100%75%100%0%68%70% D 72%93%80%88%81%72%50%100%0%59%90% % 85%73%76%50%100%0%44%90% B 85%90%100%92%100% 85%62%100% A 97%100%95%100%92%76%100% 90%100%85%

Grading is not fun!!!

The Costs of Production The Law of Supply: u Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. u 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. u Explicit costs involve a direct money outlay for factors of production. u Implicit costs do not involve a direct money outlay.

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

Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue

Total Revenue……….. $50,000 Cost of making Cheetos…. $30,000 Laborers' wages… $7,000 Utilities… $5,000 Total Explicit Costs… $42,00 8,000 is what?

BUT Forgone interest Forgone rent Forgone wages Forgone 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 = Marginal product

Diminishing Marginal Product uDiminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. uExample: 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 uThe slope of the production function measures the marginal product of an input, such as a worker. uAs the marginal product declines, the total production curve slopes downward

From the Production Function to the Total- Cost Curve uThe relationship between the quantity a firm can produce and its costs determines pricing decisions. uThe total-cost curve shows this relationship graphically.

A Production Function and Total Cost Hungry Helen’s Cookie Factory

Total-Cost Curve... Total Cost $ Quantity of Output (cookies per hour) Total-cost curve

The Various Measures of Cost Costs of production may be divided into fixed costs and variable costs.

Fixed and Variable Costs uFixed costs are those costs that do not vary with the quantity of output produced. uVariable costs are those costs that do change as the firm alters the quantity of output produced.

Family of Total Costs uTotal Fixed Costs (TFC) uTotal Variable Costs (TVC) uTotal Costs (TC) TC = TFC + TVC

Family of Total Costs QuantityTotal CostFixed CostVariable Cost 0$ 3.00 $

Average Costs uAverage costs can be determined by dividing the firm’s costs by the quantity of output produced. uThe average cost is the cost of each typical unit of product.

Family of Average Costs uAverage Fixed Costs (AFC) uAverage Variable Costs (AVC) uAverage Total Costs (ATC) ATC = AFC + AVC

Family of Average Costs