Learning Objective: – Today I will be able to determine when a firm shuts down by calculating total cost and marginal revenue. Agenda 1.Learning Objective 2.Lecture: Ch Worksheet 4.Exit Slip Notes Title: Ch. 5.3 Production & Cost

2 Types of Cost – Fixed Cost: doesn’t change at short-run. – Variable Cost: labor b/c it varies at short-run & varies w/ the amount produced. Ex. Uhaul, if no workers hired, there is still a fixed cost even if nothing is getting done. But, if workers are hired & give them different wages, then labor becomes variable cost.

Total Cost = Fixed Cost + Variable Cost Marginal Cost – How Total Cost changes w/ output (Total Product) – Reflects changes of productivity of labor (variable resource) – In other words: Marginal Cost = Change in Total Cost Change in Quantity Ex. Total cost went from $200 when nothing was product (No Total Product) to $300 when Total Product increased to 2. Change in Total Cost is $100. Change in Quantity is 2. $ 100 = $50 2 Marginal Cost= $50

Check for Understanding What are the two types of cost??? Why is labor considered a variable cost??? What is the marginal cost formula????

Marginal Cost Curve – At first slopes down b/c marginal returns (Remember! Marginal returns is when you add labor & you get more output/total product) – Then slopes up b/c law of diminishing returns (Remember! It’s when you add labor & you get more output/total product, BUT, not that much) Ex. At 3 tons per/day, cost is $48. After adding labor you move 9 tons per/day, cost is $25. (marginal returns) After adding even more labor, 15 tons per/day, cost is $80. (law of Di. Re.)

Marginal revenue – The benefit suppliers get from supplying an additional unit. – Change in total revenue from selling 1more unit. Ex. Week 1, student sell one box of chips, his revenue is $30. Week 2, student sells two boxes of chip, his revenue is $60. The Marginal Revenue= $30, b/c his revenue changed by $30.

If marginal revenue exceeds/equals marginal cost, producers will continue to sell additional units. Total revenue should cover at least variable cost--  if not, firm will SHUTDOWN. TOTAL REVENUE Variable Cost Definitions: Marginal revenue– change of revenue after selling additional unit. Marginal cost– change of cost after selling additional unit. Example: Each box of chips is $10, in week two you sold one more unit (one more box), therefore, you had to pay $20. Change of cost $10 (Marginal Cost). Marginal revenue was $30. Marginal revenue covers marginal cost, therefore, we continue to sell more boxes.

Check for Understanding Why does marginal cost curve slope down? – Later, why does it slope up? What is marginal revenue? When do we decide to shutdown the firm?

Shutdown Decision: – At short-run, better to shutdown below minimum acceptable price (Marginal Revenue doesn’t cover Variable cost) Minimum acceptable price: marginal revenue covers variable cost*** – Still pay fixed cost Going out of business there are no fixed cost.

Competitive firm’s supply curve: – Upward sloping portion of supply curve. – Above the min. acceptable price. Example: $33.33 is the min. acceptable price. Supply curve slopes upward after $33.33, which is the competitive firm’s supply curve.

Check for Understanding At what price do firm’s decide to shut down?? What cost must still be paid after the firm shuts down? When does the Competitive Firm’s Supply curve begin to slope upward???

Worksheet Time

Exit Slip Your friend hooked up with Disneyland tickets, 5 tickets for $300. You decide to sell one ticket for $100. But, you want to make a little more money and you sell one more ticket. – What is marginal cost? – What is your marginal revenue? – If you decide make a business out of selling tickets. Would you need shut down? Why or why not? Note: Total cost is variable cost, in this example****

Title notes: Ch. 5.3 continued Average cost = total cost output Firm’s long-run cost indicates lowest average cost of producing each output. Economies of scale – Firm increases; long- average cost decreases. – b/c abor replaced by capital

Long-run average cost increases as production increases.  diseconomies of scale Constant return to scale  no increase/decrease of production & long-run average cost.

Long-run average cost curve – Reflects economies to scale, diseconomies to scale, & constant return to scale – Draw the graph.

Firms plan for the long-run, but produce at short run. When marginal revenue = marginal cost, firms choose output.