1. Chapter 4 – Costs of Production
Part III
Chapter 4 – Costs of Production

2. Vegan Or Meat Eater

3. Question: What is the opportunity cost to produce one more bushel of vegetables?

4. Question: What is the opportunity cost to produce one more bushel of vegetables?
We tend to think of opportunity cost in single units, hence, how many bushes of vegetables were given up to produce on more cow?
Even if they did not want to produce any vegetables, they forego producing vegetables for cows
For each cow produced, 50 bushels of vegetables were not produced therefore this is our opportunity cost
50 bushels : 1 cow OR 1 bushel: 1/50th of cow

5. Car How much does it cost to own a car?
Using Visual 4A: Opportunity cost of a car, write down the range of direct expenses under the $ heading
Using Visual 4B: Transfer your 4A list to the empty space
Where else could the money have been spent
Add these to the opportunity cost column (Not $ value)
List the future uses as well
What is the opportunity cost of maintaining the car in working order? What else could be purchased with the money?

6. What are you going to do to raise the money necessary to cover the $$ cost?
What is the cost of using our own resources?
Time -> Implicit cost, there is no cash outlay but we give up doing something else
Any others?
 less room in garage, your effect on the environment, and etc.
Having a car would (benefit) reduce the time spent getting to places vs walking or biking
What is the implicit cost? Missing out on the exercise

8. Opportunity Cost of College
Room and board is something you NEED regardless of your choice
Suppose that the alternative is living in your old room at home, this still does NOT eliminate the cost since your family COULD have rented out the room => Sacrificed! Thus, the room and board expense should be EXCLUDED from the opportunity cost
Types of Expenses
Tuition and Fees
Books and Supplies
Room and Board
Transportation
Tuition and Books are $$ ONLY when you attend college, they represent something sacrificed for THAT choice and is part of opportunity cost
Costs that are PAID OUT are called explicit cost

9. An implicit cost – sacrifices for which no money changes hands
In this example, the biggest sacrifice in this category is time.. But what is that time worth? This depends on what you would be doing if you were not in school
working a full time job => foregone income
Suppose highschool graduate working full time can earn $22,000, if we assume that only 9 months of work must be sacrificed when attending college, then the forgone income is 9 /12 months of $22,000 => $16,500

10. In production
Economic Cost = Direct Cost + Indirect Cost (aka Opp Cost) Economic Cost = Explicit Cost + Indirect Cost
Economic Cost = Accounting cost + Opportunity Cost

11. Question
Suppose Jessica is a freelance writer who decides to see a movie. The ticket price is $10, and the entire activity – including getting there and back – will take 3 hours out of her evening. What is the economic cost of seeing this movie?
Suppose that Jessica earns $20/hr as a writer
Each hour that Jessica chooses NOT to work causes her to give up $20 in earnings

12. Economic cost = Direct + indirect cost = Explicit + Implicit
= $10 (Ticket) + ($20/hr x 3 hours) = = $70 in opportunity cost
The idea that $70 is quite ridiculous, but if you think about it, $70 is a much better estimate than $10 of what the movie costs for Jessica because she gives up 3 hours that could have been spent working on an article that on average would provide her with another $60.

13. Suppose Samantha is an attorney who bills out her time at $100/hr
Suppose Samantha is an attorney who bills out her time at $100/hr. For her, the economic cost of the same movie (3 hours + the ticket) would be $310!!!

14. Why would Samantha/Jessica would ever see a movie at such a high cost?
When the benefits of the movie are GREATER than the explicit and implicit costs
Imagine Samantha takes on more and more clients and works longer and longer, earning more income.
At some point, Samantha, will realize that leisure activities like movies are important while earning income will seem less important

15. Opportunity Costs
You have a ticket to see your favorite musician in concert. You need to decide whether you will take an airplane or the bus to the show. You must pay for the transportation yourself. The bus trip will take you five hours. It will only take one hour if you fly. Assume the airfare is $150 and the bus fare is $50.
Bus or Fly?

16. You have a ticket to see your favorite musician in concert
You have a ticket to see your favorite musician in concert. You need to decide whether you will take an airplane or the bus to the show. You must pay for the transportation yourself. The bus trip will take you five hours. It will only take one hour if you fly. Assume the airfare is $150 and the bus fare is $50.
Assume nothing else changes; the rest of the world is standing still. If you could earn six dollars per hour when not on the bus or airplane, which mode of transportation would be cheaper?

17. Correction from Last Class
Economic Cost = Direct Cost + Indirect Cost
Therefore EC of busing = $50 (ticket for taking the bus) + (5 hours * $6/hr) = $80
EC of Flying = $150 + (1 hour * $6/hr) = $156
Therefore it is better if we BUS

18. Question
By taking an airplane, Mr. Lai can travel from Vancouver to Kelowna for his MTG tournament in 1 hour. The same trip takes 5 hours by bus. Airfare is $90 and bus fare is $30.
Mr. Lai, when not traveling, can work and earn $30/hour
What is the economic cost (EC) for Mr. Lai of traveling by bus?
What is the EC for Mr. Lai of traveling by plane?
Which is the cheaper mode of travel for Mr. Lai
How would the answers be different for another person (ie: Mr. OG who can work and earn $6/hour at a local food store when not traveling)?

19. What is the economic cost (eC) for Mr. Lai of traveling by bus?
Economic Cost = Direct Cost + Indirect Cost
= $30 + (5 hours) * ($30/Hr)
= $180

20. What is the EC for Mr. Lai of traveling by plane?
EC (plane) = $90 + (1 hour) ($6/hour) = $96

21. Which is the cheaper mode of travel for Mr. Lai
Taking the Plane!!

22. How would the answers be different for another person (ie: Mr
How would the answers be different for another person (ie: Mr. OG who can work and earn $6/hour at a local food store when not traveling)?
EC (bus) = $30 + (5 hours)($6/hour) = $60
EC (plane) = $90 + (1 hour) ($6/hour) = $96
Therefore, bus is cheaper for Mr. OG

23. Implicit Vs Opportunity Costs
Opportunity Cost is the sacrifice given or the cost given up for getting the alternative. Eg:- i go to school everyday sacrificing my sleep so here sleep is my opportunity cost and education at school is the better alternative. Implicit Cost is a slightly tilted concept. It is the cost of self owned inputs used in the production process of a commodity. Eg:- if my father runs a business and he has a car idle at home and if he uses that car in business then it is his implicit cost i.e. cost of self imposed fixed asset.

24. Inputs are combined to make total product.
The overall quantity of output produced with a given workforce
Includes all variable inputs
Other product measures include:
average product, which is total product divided by the number of workers
marginal product, which is the extra total product associated with an additional worker

25. Try the Stations (6 groups)

26. Average Product The quantity of output produced per worker
Average Product = Total Product (q) # of workers (L)

27. The Law of Diminishing Marginal Returns
Short-run production is determined by the law of diminishing marginal returns. According to this law:
the addition of more variable input causes marginal product to fall after some point
average product also falls after some point
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

28. Total, Marginal, and Average Products1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 50
100
150
200
250
300
Labour
(L)
(workers
per day)
Total
Product
(q)
(T-shirts
Marginal
(Δq/ΔL)
Average
(q/L) 1 2 3 4 5 6 TP 80
200
250
270
280 -- 80
100
83.3
67.5 56 45 80
120 50 20 10
-10 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 40 60 80
100
120
-20 20
Diminishing
returns set in AP MP

29. Three Stages of Production
First Part
Top graph’s first range, total product total product RISES at an INCREASING rate (thus, + slope)
The bottom graph, marginal product RISES as more workers are ADDED 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 50
100
150
200
250
300 TP 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 40 60 80
100
120
-20 20
Diminishing
returns set in AP MP

30. Marginal product begins to fall but is still positive
Second Part
Marginal product begins to fall but is still positive
Total product continues to rise, but at a lower rate (curve becomes flatter) 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 50
100
150
200
250
300 TP 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 40 60 80
100
120
-20 20
Diminishing
returns set in AP MP

31. Marginal product falls BELOW zero Total Product decreases
Third Part
Marginal product falls BELOW zero
Total Product decreases 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 50
100
150
200
250
300 TP 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 40 60 80
100
120
-20 20
Diminishing
returns set in AP MP

32. Average Vs Marginal Product
Let’s use EXAMS as an example (get the pun?)
Marginal mark is the mark on each test
Average mark is the total earned so far divided by the number of completed tests
IE: Marginal Mark for Test 1: 36/ Marginal Mark for Test 2: 34/50
Average Mark: (36+34)/2 = 35

33. Costs in the Short Run Fixed Costs (costs of all fixed inputs)
Variable Costs (costs of all variable inputs)
Total Costs (FC + VC)

34. Marginal Cost
Marginal cost is the extra cost of producing another unit of output.
It equals the change in total cost divided by the change in total product.
The marginal cost curve is shaped like a “J” because of the law of diminishing marginal returns.

35. Quantity of T-Shirts Produced Per Day
Marginal Cost 50
100
150
200
250
300
Quantity of T-Shirts Produced Per Day
$ per T-Shirt 2 4 6 8 10 12 MC
Diminishing
returns set in
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

36. Per-Unit Costs Think-Pair-Share
What does it mean? What does it include?
Avg FC (FC divided by total product produced)
Avg VC (VC divided by total product produced)
Average cost
Total cost / Total Product
Avg FC + Avg VC

37. You try!
Try this worksheet!

38. Short-Run Costs for Pure ‘n’ Simple T-Shirts
Labour
(L)
Total
Product
(q)
Fixed
Costs
(FC)
Variable
(VC)
Cost
(TC)
(FC + VC)
Marginal
(MC)
(ΔTC/Δq)
Average
Fixed Costs
(AFV)
(FC/q)
(AVC)
(VC/q)
(AC)
(AFC + AVC)
Marginal Product (MP) 1 2 3 4 5 80
200
250
270
280
$825
825 $0
140
300
425
535
640
$825
965
1125
1250
1360
1465 80
120 50 20 10
140
160
125
110
105
$1.75
1.33
2.50
5.50
10.50
$10.31
4.13
3.30
3.06
2.95
$1.75
1.50
1.70
1.98
2.29
$12.06
5.63
5.00
5.04
5.24
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

39. Attempt the worksheet. Work in groups of two! 

40. Next week
Quiz on Economic Profit/ Accounting Profit/Opportunity Cost, NEXT WEEK (15-20 min quiz)