1 Module 14 Cost in the Short Run. ObjectivesObjectives  Understand the relationship between the short run production function and short run costs. 2.

Slides:



Advertisements
Similar presentations
13.1 ECONOMIC COST AND PROFIT
Advertisements

10 Production and Cost CHAPTER. 10 Production and Cost CHAPTER.
 fixed costs – costs that do not vary with the level of output. Fixed costs are the same at all levels of output (even when output equals zero).  variable.
11 OUTPUT AND COSTS © 2012 Pearson Addison-Wesley.
10 Output and Costs Notes and teaching tips: 4, 7, 23, 27, 31, and 54.
10 Output and Costs Notes and teaching tips: 4, 7, 23, 27, 31, and 54.
Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The.
11 OUTPUT AND COSTS. 11 OUTPUT AND COSTS Notes and teaching tips: 5, 8, 26, 29, 33, and 57. To view a full-screen figure during a class, click the.
1 ATC AVC MC Relationship Between Average and Marginal Costs Costs per unit Quantity Q1Q1 B Q0Q0 A.
10 OUTPUT AND COSTS CHAPTER.
1 Short-Run Costs and Output Decisions. 2 Decisions Facing Firms DECISIONS are based on INFORMATION How much of each input to demand 3. Which production.
1 Chapter 8 Costs of Production Costs of Production Principles of Economics by Fred M Gottheil PowerPoint Slides prepared by Ken Long © ©1999 South-Western.
All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 1 1MICROECONOMICS.
Marginal Cost and Average Cost. Marginal Cost Remember Marginal Cost? Remember Marginal Cost? The change in total cost generated by producing one more.
Economics 101 – Section 5 Lecture #13 – February 26, 2004 Introduction to Production.
Module 15 Costs in the Long Run 1. Objectives:Objectives:  Define long run average cost.  Understand how to construct the long run average cost curve.
1 Module 13 The Short Run Production Function. 2   Define a production function, define the three concepts of production–total product, marginal product,
Module 14 Cost in the Short Run.
Short-Run Costs and Output Decisions
Lecture 9: The Cost of Production
Economics 2010 Lecture 11 Organizing Production (I) Production and Costs (The short run)
CHAPTER 11 Output and Costs
Today Production and cost in the Short Run
Production Costs In the short run for a firm Production Costs Are The mirror image Of productivity.
The Firm and Cost Overheads. Costs in the short run Total cost — everything they must give up in order to produce output A firm’s total cost of production.
ECON107 Principles of Microeconomics Week 12 NOVEMBER w/11/2013 Dr. Mazharul Islam Chapter-11.
Copyright © 2006 Pearson Education Canada Output and Costs 11 CHAPTER.
Aim: What are short-run production costs? Do Now: What are explicit costs? Implicit costs?
11 OUTPUT AND COSTS © 2012 Pearson Addison-Wesley The Firm and Its Economic Problem A firm is an institution that hires factors of production and organizes.
1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics.
Production and Cost CHAPTER 13 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Explain how.
8 Short-Run Costs and Output Decisions CHAPTER OUTLINE Costs in the Short Run Fixed Costs Variable Costs Total Costs Short-Run Costs: A Review Output Decisions:
The Short Run Production Function
© 2010 Pearson Addison-Wesley CHAPTER 1. © 2010 Pearson Addison-Wesley.
Average product is the output per worker
Short-Run Production Costs. fixed input Any resource for which the quantity cannot change during the period of time under consideration.
Cost Curve Model Chapter 13 completion. Costs of Production Fixed costs - do not change with quantity of output Variable costs - ↑ with quantity of output.
A.P. Microeconomics Daily: Draw & label no the same axis set, TFC, AFC & TVC.
Output and Costs CHAPTER 10. After studying this chapter you will be able to Distinguish between the short run and the long run Explain the relationship.
Lecture notes Prepared by Anton Ljutic. © 2004 McGraw–Hill Ryerson Limited A Firm’s Production and Costs in the Short Run CHAPTER SIX.
AP Economics Mr. Bernstein Module 55: Firm Costs November 2015.
Today Production and cost in the Short Run. How Costs Vary with Output.
KRUGMAN'S MICROECONOMICS for AP* Firm Costs Margaret Ray and David Anderson Micro: Econ: Module.
COST ANALYSIS CHAPTER # 5. Meaning of Cost  By cost we mean “The total sum of money required for the production of specific quantity of a good or service.
1 Module 14 Cost in the Short Run. Objectives:Objectives:  Understand the relationship between the short run production function and short run costs.
© 2010 Pearson Addison-Wesley. Decision Time Frames The firm makes many decisions to achieve its main objective: profit maximization. Some decisions are.
The Theory of the Firm COSTS TC, MC, AC. BLINK & DORTON, (2007) p73-94.
Behaviours Of Cost Curves
Short-Run Costs and Output Decisions
Costs in the Short Run.
Short-Run Costs and Output Decisions
The Shape of the Marginal Cost Curve in the Short Run
Short-Run Costs and Output Decisions
Cost Curve Model Chapter 13 completion.
Production & Costs in the Short-run
Production Theory A2 Economics Unit 3.
Firm Cost.
A2 Economics Mr. Durham
Thinking About Costs A firm’s total cost of producing a given level of output is ______________ Everything they must give up in order to produce that amount.
Module 55: Firm Costs.
Firm Costs Module KRUGMAN'S MICROECONOMICS for AP* Micro: Econ:
Cost Curve Model Chapter 13 completion.
CHAPTER 6 COST OF PRODUCTION. CHAPTER 6 COST OF PRODUCTION.
NİŞANTAŞI ÜNİVERSİTESİ
Chapter 6 Production and Cost
Marginal product first rises due to increasing marginal returns and then falls due to diminishing marginal returns. Adding workers first increases output.
Short-Run Costs and Output Decisions
8 Short-Run Costs and Output Decisions Chapter Outline
CHAPTER 6 COST OF PRODUCTION. CHAPTER 6 COST OF PRODUCTION.
Presentation transcript:

1 Module 14 Cost in the Short Run

ObjectivesObjectives  Understand the relationship between the short run production function and short run costs. 2

ObjectivesObjectives  Define total cost, total variable cost and total fixed cost.  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost. 3

ObjectivesObjectives  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost.  Define average total cost, average variable cost, average fixed cost and marginal cost.  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost.  Define average total cost, average variable cost, average fixed cost and marginal cost. 4

ObjectivesObjectives  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost.  Define average total cost, average variable cost, average fixed cost and marginal cost.  Know and be able to use the cost formulas to calculate costs.  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost.  Define average total cost, average variable cost, average fixed cost and marginal cost.  Know and be able to use the cost formulas to calculate costs. 5

ObjectivesObjectives  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost.  Define average total cost, average variable cost, average fixed cost and marginal cost.  Know and be able to use the cost formulas to calculate costs.  Understand the relationship between marginal product and marginal cost of production.  Understand the relationship between the short run production function and short run costs.  Define total cost, total variable cost and total fixed cost.  Define average total cost, average variable cost, average fixed cost and marginal cost.  Know and be able to use the cost formulas to calculate costs.  Understand the relationship between marginal product and marginal cost of production. 6

 Understand the relationship between marginal cost and average total cost, and marginal cost and average variable cost. 7 Objectives continued

 Understand the relationship between marginal cost and average total cost, and marginal cost and average variable cost.  Understand what happens to average fixed cost as output increases and what this implies about the average total cost and average variable cost curves. 8 Objectives continued

 Understand the relationship between marginal cost and average total cost, and marginal cost and average variable cost.  Understand what happens to average fixed cost as output increases and what this implies about the average total cost and average variable cost curves.  Be able to graph the cost curves.  Understand the relationship between marginal cost and average total cost, and marginal cost and average variable cost.  Understand what happens to average fixed cost as output increases and what this implies about the average total cost and average variable cost curves.  Be able to graph the cost curves. 9 Objectives continued

 Costs are derived from the production function. Objective 1 10 Understand the relationship between the short run production function and short run costs

 Costs are derived from the production function.  Consider a simple 2-input short run production function, like the one we used for the Acme Box Company: Q = f (L, K 0 ) where L= the variable input, labor and K 0 = the fixed input, capital. Objective 1 11 Understand the relationship between the short run production function and short run costs

 Costs are derived from the production function.  Consider a simple 2-input short run production function, like the one we used for the Acme Box Company: Q = f (L, K 0 ) where L= the variable input, labor and K 0 = the fixed input, capital.  From the production function, we can write an expression for total cost. Total Cost = Labor Costs + Capital Cost = Total Variable Cost + Total Fixed Cost = Total Variable Cost + Total Fixed Cost Objective 1 12 Understand the relationship between the short run production function and short run costs

 Total Fixed Costs (TFC)  Total Fixed Costs (TFC) refer to the total expenditure by the firm for fixed inputs. Objective 2 Define Total Fixed Cost … 13

 Total Fixed Costs (TFC)  Total Fixed Costs (TFC) refer to the total expenditure by the firm for fixed inputs.  overheads  Fixed costs do not change when firms increase or decrease their output. The lay person thinks of fixed costs as overheads. Objective 2 Define Total Fixed Cost … 14

 Total Fixed Costs (TFC) refers to the total expenditure by the firm for fixed inputs.  Fixed costs do not change when firms increase or decrease their output. The lay person thinks of fixed costs as overheads. Objective 2 Define Total Fixed Cost … 15

 Total Variable Costs (TVC) refer to total expenditure on variable inputs, for example, the wages paid for labor services and the cost of raw materials purchased to produce the product. 16 Objective 2: … total variable cost and total cost

 Total Variable Costs (TVC) refer to total expenditure on variable inputs, for example, the wages paid for labor services and the cost of raw materials purchased to produce the product.  Total Costs (TC) refer to the total expenditure on all inputs used to produce a product. It is the sum of fixed costs and variable costs. 17 Objective 2: … total variable cost and total cost

Objective 2: … fixed cost, variable cost and total cost Objective 2: … fixed cost, variable cost and total cost Total Cost = Total Fixed Cost + Total Variable Cost 18

Can you determine these values? 19

Objective 3  Average costs tells you how much a product costs per unit of output. In the short run, there are three average cost variables,one corresponding to each category of costs. Define average total cost, average variable cost, average fixed cost and marginal cost 20

Objective 3  Average costs tells you how much a product costs per unit of output. In the short run, there are three average cost variables,one corresponding to each category of costs. 1.Average Fixed cost (AFC) Define average total cost, average variable cost, average fixed cost and marginal cost 21

Objective 3  Average costs tells you how much a product costs per unit of output. In the short run, there are three average cost variables,one corresponding to each category of costs. 1.Average Fixed cost (AFC) 2.Average Variable Cost (AVC) Define average total cost, average variable cost, average fixed cost and marginal cost 22

Objective 3  Average costs tells you how much a product costs per unit of output. In the short run, there are three average cost variables,one corresponding to each category of costs. 1.Average Fixed cost (AFC) 2.Average Variable Cost (AVC) 3.Average Total Cost (ATC) or simply Average Cost (AC) Define average total cost, average variable cost, average fixed cost and marginal cost 23

Total Cost = Average Total Cost  Quantity 24 Objective 3: … the three “average” cost variables..

Total Cost = Average Total Cost  Quantity 25 Objective 3: … the three “average” cost variables..

Total Cost = Average Total Cost  Quantity    26 Objective 3: … the three “average” cost variables..

 Marginal Cost  Marginal Cost is the addition to total cost resulting from producing one more unit of output. 27 Objective 3: … define marginal cost

 Marginal Cost  Marginal Cost is the addition to total cost resulting from producing one more unit of output. Objective 3: … define marginal cost 28

 Marginal Cost  Marginal Cost is the addition to total cost resulting from producing one more unit of output. 29 Objective 3: … define marginal cost

 Marginal Cost  Marginal Cost is the addition to total cost resulting from producing one more unit of output.  Since fixed cost is constant, the equation above equals: 30 Objective 3: … define marginal cost

 Marginal Cost  Marginal Cost is the addition to total cost resulting from producing one more unit of output.  Since fixed cost is constant, the equation above equals:  In the short run, marginal cost is independent of fixed costs. 31 Objective 3: … define marginal cost

Objective 4 Know and be able to use the cost formulas to calculate costs Know and be able to use the cost formulas to calculate costs 32

Objective 4  Example: We will revisit the Acme Box Company. Suppose Acme’s Fixed Costs equals $1,000 and the firm hires labor at a constant wage of $60 per unit. Know and be able to use the cost formulas to calculate costs Know and be able to use the cost formulas to calculate costs 33

Suppose Acme’s fixed costs equals $1,000. Objective 4: Calculating Costs … 34 (1)(2)(3)(4) Labor(L) Total Product (Q) Marginal Product (MPL) (MPL) Total Fixed Cost (TFC) $

 Acme’s hires labor at a constant wage of $60 per unit of labor. Its labor costs are its only variable costs. Labor Costs = Variable Costs = wage rate  labor units (1)(2)(3)(4)(5)=(1)x$60 Labor(L) Total Product (Q) Marginal Product (MPL) (MPL) Total Fixed Cost (TFC) $ Total Variable Cost (TVC) $ x60= x60= x60= Objective 4: Calculating Costs …

Acme’s Total Cost = Fixed Cost + Variable Cost Objective 4: Calculating Costs … (1)(2)(3)(4)(5) (6)=(4) +(5) Labor(L) Total Product (Q) Marginal Product (MPL) (MPL) Total Fixed Cost (TFC) $ Total Variable Cost (TVC) $ Total Cost (TC)$ = = =

Average Fixed Cost = Fixed Cost ÷ Output Objective 4: Calculating Costs … 37 (1)(2)(3)(4)(5) (6)=(4) +(5) (7)=(4) (2) (7)=(4) ÷(2) Labor(L) Total Product or Output (Q) Marginal Product (MPL) (MPL) Total Fixed Cost (TFC) $ Total Variable Cost (TVC) $ Total Cost (TC)$ Average Fixed Cost (AFC) $ ÷8= ÷23= ÷42=

Average Variable Cost = Total Variable Cost ÷ Output Objective 4: Calculating Costs … 38 (1)(2)(3)(4)(5)(6)(7) (8)=(5) ÷(2) Labor(L) Total Product or Output (Q) Marginal Product (MPL) (MPL) Total Fixed Cost (TFC) $ Total Variable Cost (TVC) $ Total Cost (TC)$ Average Fixed Cost (AFC in $) Average Variable Cost (AVC in $) ÷8= ÷23= ÷42=

Average Total Cost = Average Fixed Cost + Average Variable Cost, or Average Total Cost = Total Cost ÷ Output Objective 4: Calculating Costs … 39 (1)(2)(3)(4)(5)(6)(7)(8) (9)=(6) (2) (9)=(6) ÷ (2) Labor(L) Total Product or Output (Q) Marginal Product (MPL) (MPL) Total Fixed Cost (TFC) $ Total Variable Cost (TVC) $ Total Cost (TC)$ Average Fixed Cost (AFC in $) Average Variable Cost (AVC in $) Average Total Cost (ATC in $) ÷8= ÷ 8= ÷23= ÷23= ÷42= ÷ 42=

Marginal Cost = ∆ Total Cost ÷ ∆ Output, or in the short run, Marginal Cost = ∆ Variable Cost ÷ ∆ Output Objective 4: Calculating Costs … 40 (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)=∆(5)÷(3) Labor(L) Total Product or Output (Q) Marginal Product (MPL) (MPL) Fixed Cost (TFC) $ Variable Cost (TVC) $TotalCost(TC)$ Average Fixed Cost (AFC) $ Average Variable Cost (AVC) $ Average Total Cost (ATC) $ Marginal Cost (MC)$ ÷ 8= ÷ 15= ÷ 19=

Objective 5 Understand the relationship between marginal product and marginal cost of production Understand the relationship between marginal product and marginal cost of production 41

Objective 5 Below is a segment of the Table for the Acme Box Company. Understand the relationship between marginal product and marginal cost of production Understand the relationship between marginal product and marginal cost of production Labor(L) Total Product or Output (Q) Marginal Product of Labor (MPL) Marginal Cost (MC)$ (1)(2)(3)(4)

Objective 5 Below is a segment of the Table for the Acme Box Company. Understand the relationship between marginal product and marginal cost of production Understand the relationship between marginal product and marginal cost of production Labor(L) Total Product or Output (Q) Marginal Product of Labor (MPL) Marginal Cost (MC)$ Increasing Marginal Returns segment 43

Objective 5 Below is a segment of the Table for the Acme Box Company. Understand the relationship between marginal product and marginal cost of production Understand the relationship between marginal product and marginal cost of production Labor(L) Total Product or Output (Q) Marginal Product of Labor (MPL) Marginal Cost (MC)$ Increasing Marginal Returns segment Diminishing Marginal Returns segment 44

 In the increasing marginal returns segment, when marginal product is rising, marginal cost is falling. Objective 5: … the relationship between marginal product and marginal cost of production Objective 5: … the relationship between marginal product and marginal cost of production 45

 In the increasing marginal returns segment, when marginal product is rising, marginal cost is falling.  In the diminishing marginal returns segment, when marginal product is falling, marginal cost is rising. Objective 5: … the relationship between marginal product and marginal cost of production Objective 5: … the relationship between marginal product and marginal cost of production 46

 In the increasing marginal returns segment, when marginal product is rising, marginal cost is falling.  In the diminishing marginal returns segment, when marginal product is falling, marginal cost is rising.  In the negative marginal returns segment, what do you think is happening to marginal cost? Yes, it is rising fast! Objective 5: … the relationship between marginal product and marginal cost of production Objective 5: … the relationship between marginal product and marginal cost of production 47

 What then is the shape of the marginal cost curve? 48 Objective 5: … the relationship between marginal product and marginal cost of production Objective 5: … the relationship between marginal product and marginal cost of production

 What then is the shape of the marginal cost curve? It is U-shaped. 49 Objective 6: … the relationship between marginal product and marginal cost

Objective 6 Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost 50

Objective 6  When marginal cost (MC) is less than either average total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall. Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost 51

Objective 6  When marginal cost (MC) is less than either average total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.  When MC is greater than either ATC or AVC, it causes ATC or AVC to rise.  When marginal cost (MC) is less than either average total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.  When MC is greater than either ATC or AVC, it causes ATC or AVC to rise. Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost 52

Objective 6  When marginal cost (MC) is less than either average total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.  When MC is greater than either ATC or AVC, it causes ATC or AVC to rise.  The MC curve intersects both the AVC and ATC curves at their respective minimum points.  When marginal cost (MC) is less than either average total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.  When MC is greater than either ATC or AVC, it causes ATC or AVC to rise.  The MC curve intersects both the AVC and ATC curves at their respective minimum points. Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost Understand the relationship between marginal cost, average total cost, and average variable cost average total cost, and average variable cost 53

 The average total cost and average variable curves are also U-shaped. 54 Objective 6: … the marginal cost, average total cost and average variable cost curves

 The average total cost and average variable curves are also U-shaped. 55 Objective 6: … the marginal cost, average total cost and average variable cost curves  Like the marginal cost curve, their shapes are also influenced by the law of diminishing marginal returns.

Objective 7 Understand what happens to average fixed cost as output increases cost as output increases. Understand what happens to average fixed cost as output increases cost as output increases. 56

  Average fixed costs falls as output increases.....think of this as “spreading your overheads”. Objective 7 Understand what happens to average fixed cost as output increases cost as output increases. Understand what happens to average fixed cost as output increases cost as output increases. 57

ATC = AVC + AFC ATC = AVC + AFC  AFC = ATC – AVC 58  If average fixed cost falls as output increases, what does this imply about the average variable cost and average total cost curves?

ATC = AVC + AFC ATC = AVC + AFC  AFC = ATC – AVC 59  As output expands, AFC gets smaller and smaller, which means that the difference between the ATC and the AVC curves decreases.

ATC = AVC + AFC ATC = AVC + AFC  AFC = ATC – AVC 60  As output expands, AFC gets smaller and smaller, which means that the difference between the ATC and the AVC curves decreases.

Objective 8:Be able to graph the cost curves Objective 8: Be able to graph the cost curves 61

 Graph the cost curves using the data for the Acme Box Company.  Graph the cost curves using the data for the Acme Box Company. Objective 8:Be able to graph the cost curves Objective 8: Be able to graph the cost curves 62 (2)(4)(5)(6)(7)(8)(9)(10)=∆(5)÷(3) Total Product or Output (Q) Fixed Cost (TFC) $ Variable Cost (TVC) $TotalCost(TC)$ Average Fixed Cost (AFC) $ Average Variable Cost (AVC) $ Average Total Cost (ATC) $ Marginal Cost (MC)$

 Can you identify the curves in the diagram? Objective 8:Be able to graph the cost curves Objective 8: Be able to graph the cost curves 63

H = Average Fixed Cost curve 64

E = Marginal Cost curve 65

F = Average Total Cost curve 66

G = Average variable Cost curve 67

E = Marginal Cost curve a = minimum point on the marginal cost curve. Diminishing marginal returns set in at this point. 68

G = Average Variable Cost curve b = minimum point on the average variable cost curve. The marginal cost curve cuts the average variable cost curve at this point. 69

F = Average Total Cost curve C = minimum point on the average total cost curve. The marginal cost curve cuts the average total cost curve at this point. 70

You should be able to draw and identify these graphs. 71 Objective 9:Be able to graph the cost curves Objective 9: Be able to graph the cost curves

72 End of Module 14 Cost in the Short Run Song:The Money Song Album:Monty Python Sings Artist:Eric Idle