1. The Costs of Production Chapter 13 Copyright © 2004 by South-Western,a division of Thomson Learning.

2. Chapter 13 the costs of production In this chapter you will: Examine what items are included in a firm ’ s costs of production analyze the link between a firm ’ s production process and its total costs learn the meaning of average total costs and marginal cost and how they are related

3. Consider the shape of a typical firm ’ s cost curves examine the relationship between short-run and long-run costs

4. Key concept Total revenue Total cost profit Production function Marginal product Diminishing marginal product Fixed costs Variable costs Average total cost Average fixed cost Average variable cost Marginal cost Efficient scale Economies of scale Diseconomies of scale Constant returns to scale

5. 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.

6. The Firm ’ s Objective The economic goal of the firm is to maximize profits.

7. A Firm ’ s Total Revenue and Total Cost u Total Revenue u The amount that the firm receives for the sale of its output. u Total Cost u The amount that the firm pays to buy inputs.

8. A Firm ’ s Profit Profit is the firm ’ s total revenue minus its total cost. Profit = Total revenue - Total cost

9. Costs as Opportunity Costs A firm ’ s cost of production includes all the opportunity costs of making its output of goods and services.

10. 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.

11. Economic Profit versus Accounting Profit  Economists measure a firm ’ s economic profit as total revenue minus all the opportunity costs (explicit and implicit).  Accountants measure the accounting profit as the firm ’ s total revenue minus only the firm ’ s explicit costs. In other words, they ignore the implicit costs.

12. 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.

13. 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

14. A Production Function and Total Cost

15. The Production Function The production function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.

16. 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.

17. Marginal Product Additional input Additional output = Marginal product

18. Diminishing Marginal Product u Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. u Example: 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.

19. A Production Function... Quantity of Output (cookies per hour) 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 Number of Workers Hired 012345 Production function

20. Diminishing Marginal Product u The slope of the production function measures the marginal product of an input, such as a worker. u When the marginal product declines, the production function becomes flatter.

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

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

23. Total-Cost Curve... Total Cost $80 70 60 50 40 30 20 10 Quantity of Output (cookies per hour) 0 20401401201008060 Total-cost curve

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

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

26. Family of Total Costs u Total Fixed Costs (TFC) u Total Variable Costs (TVC) u Total Costs (TC) TC = TFC + TVC

27. Family of Total Costs QuantityTotal CostFixed CostVariable Cost 0$ 3.00 $ 0.00 13.303.000.30 23.803.000.80 34.503.001.50 45.403.002.40 56.503.003.50 67.803.004.80 79.303.006.30 811.003.008.00 912.903.009.90 1015.003.0012.00

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

29. Family of Average Costs u Average Fixed Costs (AFC) u Average Variable Costs (AVC) u Average Total Costs (ATC) ATC = AFC + AVC

30. Family of Average Costs

31. $3.00 Family of Average Costs QuantityAFCAVCATC 0——— 1$0.30$3.30 21.500.401.90 31.000.501.50 40.750.601.35 50.600.701.30 60.500.801.30 70.430.901.33 80.381.001.38 90.331.101.43 100.301.201.50

32. Marginal Cost u Marginal cost (MC) measures the amount total cost rises when the firm increases production by one unit.  Marginal cost helps answer the following question: u How much does it cost to produce an additional unit of output?

33. Marginal Cost

35. Total-Cost Curve... $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 0 24681012 Quantity of Output (glasses of lemonade per hour) Total Cost Total-cost curve

36. ATC AVC MC Average-Cost and Marginal-Cost Curves... $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 0 24681012 Quantity of Output (glasses of lemonade per hour) Costs AFC

37. Cost Curves and Their Shapes Marginal cost rises with the amount of output produced. u This reflects the property of diminishing marginal product.

38. Cost Curves and Their Shapes $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 024681012 Quantity of Output (glasses of lemonade per hour) Costs MC

39. Cost Curves and Their Shapes The average total-cost curve is U-shaped. u At very low levels of output average total cost is high because fixed cost is spread over only a few units. u Average total cost declines as output increases. u Average total cost starts rising because average variable cost rises substantially.

40. Cost Curves and Their Shapes The bottom of the U-shape occurs at the quantity that minimizes average total cost. This quantity is sometimes called the efficient scale of the firm.

41. Cost Curves and Their Shapes $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 024681012 Quantity of Output (glasses of lemonade per hour) Total Costs ATC

42. Relationship Between Marginal Cost and Average Total Cost u Whenever marginal cost is less than average total cost, average total cost is falling. u Whenever marginal cost is greater than average total cost, average total cost is rising.

43. Relationship Between Marginal Cost and Average Total Cost The marginal-cost curve crosses the average-total-cost curve at the efficient scale. u Efficient scale is the quantity that minimizes average total cost.

44. MC ATC Relationship Between Marginal Cost and Average Total Cost $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 024681012 Quantity of Output (glasses of lemonade per hour) Costs

45. The Various Measures of Cost It is now time to examine the relationships that exist between the different measures of cost.

46. The Various Measures of Cost Big Bob ’ s Bagel Bin

47. Big Bob ’ s Cost Curves... $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 0246810121416 Quantity of Output (bagels per hour) Total Cost Total Cost Curve

48. AFC AVC MC Big Bob ’ s Cost Curves... 0 0.5 1 1.5 2 2.5 3 3.5 0246810121416 Quantity of Output Costs ATC

49. Three Important Properties of Cost Curves u Marginal cost eventually rises with the quantity of output. u The average-total-cost curve is U- shaped. u The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

50. Costs in the Long Run u For many firms, the division of total costs between fixed and variable costs depends on the time horizon being considered. u In the short run some costs are fixed. u In the long run fixed costs become variable costs.

51. Costs in the Long Run Because many costs are fixed in the short run but variable in the long run, a firm ’ s long-run cost curves differ from its short-run cost curves.

52. Average Total Cost in the Short and Long Runs... Quantity of Cars per Day 0 Average Total Cost ATC in short run with small factory ATC in short run with medium factory ATC in short run with large factory ATC in long run

53. Economies and Diseconomies of Scale u Economies of scale occur when long- run average total cost declines as output increases. u Diseconomies of scale occur when long-run average total cost rises as output increases. u Constant returns to scale occur when long-run average total cost does not vary as output increases.

54. Economies and Diseconomies of Scale Diseconomies of scale Quantity of Cars per Day 0 Average Total Cost ATC in long run Economies of scale Constant Returns to scale

55. Summary u The goal of firms is to maximize profit, which equals total revenue minus total cost.  When analyzing a firm ’ s behavior, it is important to include all the opportunity costs of production. u Some opportunity costs are explicit while other opportunity costs are implicit.

56. Summary  A firm ’ s costs reflect its production process.  A typical firm ’ s production function gets flatter as the quantity of input increases, displaying the property of diminishing marginal product.  A firm ’ s total costs are divided between fixed and variable costs. Fixed costs don ’ t vary with quantities produced; variable costs do.

57. Summary u Average total cost is total cost divided by the quantity of output. u Marginal cost is the amount by which total cost would rise if output were increased by one unit. u The marginal cost always rises with the quantity of output.

58. Summary u The average-total-cost curve is U- shaped. u The marginal-cost curve always crosses the average-total-cost curve at the minimum of ATC.  A firm ’ s costs often depend on the time horizon being considered.

59. Graphical Review

60. 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

61. A Production Function... Quantity of Output (cookies per hour) 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 Number of Workers Hired 012345 Production function

62. Total-Cost Curve... Total Cost $80 70 60 50 40 30 20 10 Quantity of Output (cookies per hour) 0 20401401201008060 Total-cost curve

63. Total-Cost Curve... $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 0 24681012 Quantity of Output (glasses of lemonade per hour) Total Cost Total-cost curve

64. Average-Cost and Marginal-Cost Curves... ATC AVC MC $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 0 24681012 Quantity of Output (glasses of lemonade per hour) Costs AFC

65. Cost Curves and Their Shapes $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 024681012 Quantity of Output (glasses of lemonade per hour) Costs MC

66. Cost Curves and Their Shapes $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 024681012 Quantity of Output (glasses of lemonade per hour) Total Costs ATC

67. Relationship Between Marginal Cost and Average Total Cost MC ATC $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 024681012 Quantity of Output (glasses of lemonade per hour) Costs

68. Big Bob ’ s Cost Curves... $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 0246810121416 Quantity of Output (bagels per hour) Total Cost Total Cost Curve

69. Big Bob ’ s Cost Curves... AFC AVC MC 0 0.5 1 1.5 2 2.5 3 3.5 0246810121416 Quantity of Output Costs ATC

70. Average Total Cost in the Short and Long Runs... Quantity of Cars per Day 0 Average Total Cost ATC in short run with small factory ATC in short run with medium factory ATC in short run with large factory ATC in long run

71. Economies and Diseconomies of Scale Diseconomies of scale Quantity of Cars per Day 0 Average Total Cost ATC in long run Economies of scale Constant Returns to scale

72. 结 束 谢 谢！！