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Transcript of 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not...
![Page 1: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/1.jpg)
1
Chapter 7Production andCost of the Firm
These slides supplement the textbook, but should not replace reading the textbook
![Page 2: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/2.jpg)
2
When studying production and costs
of the firm, what assumption do I make?Producers always attempt to maximize their profit
![Page 3: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/3.jpg)
3
When studying the firm, what is the first
thing for me to know?You must have a working knowledge of key terms
![Page 4: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/4.jpg)
4
What should I do to understand this
chapter?You pretend that you are the owner of a business and you are making decisions to maximize your profit or minimize your losses
![Page 5: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/5.jpg)
5
What is revenue?
P X Q = total revenue
![Page 6: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/6.jpg)
6
What is profit?
TR - TC = Profit
![Page 7: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/7.jpg)
7
What is an explicit cost?
Opportunity cost of a firm’s resources that takes the form of cash payments
![Page 8: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/8.jpg)
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What is an implicit cost?A firm’s opportunity cost of using its own resources or those provided by its owners without corresponding cash payment
![Page 9: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/9.jpg)
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What are total costs?
Explicit costs + implicit costs
![Page 10: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/10.jpg)
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What isaccounting profit?TR minus explicit costs
![Page 11: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/11.jpg)
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What iseconomic profit?
A firm’s total revenue minus its explicit and implicit costs
![Page 12: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/12.jpg)
12
What is afixed resource?
Any production cost that does not increase as output increases
![Page 13: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/13.jpg)
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What are some examples of
fixed resources?rent or mortgageloan paymentscertain salariesa part of utilitiesproperty taxes
![Page 14: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/14.jpg)
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What is avariable cost?
Any production cost that increases as output increases
![Page 15: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/15.jpg)
15
What is total cost?The sum of fixed cost and variable cost
FC + VC
![Page 16: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/16.jpg)
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Total revenue……………………...$90,000Less explicit costs:
Assistant’s salary ………. -$15,000Material & equipment…..-$20,000
Equals accounting profit………….$55,000Less implicit costs:
Wanda’s forgone salary……-$40,000Foregone interest on savings.-$1,000Forgone garage rental………-$1,200
Equals economic profit…………...$12,800
Accounts of The Wheeler Dealer
Exhibit 1
![Page 17: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/17.jpg)
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What is normal profit?The accounting profit earned when all resources used by the firm earn their opportunity cost
![Page 18: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/18.jpg)
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Why is normal profit included as part of TC?Because just as in the payment of wages, normal profit is a necessary expense of running a business
![Page 19: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/19.jpg)
19
What does it mean that a firm is
breaking even?
It is making a normal profit
![Page 20: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/20.jpg)
20
What is another way I can define
economic profit?
Any money made above and beyond your normal profit
![Page 21: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/21.jpg)
21
What is mymarginal revenue?
The money you make by selling the last unit of output
![Page 22: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/22.jpg)
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What is mymarginal cost?
The change in your total cost resulting from a one-unit change in output
![Page 23: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/23.jpg)
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What is the short run?A period during which at least one of your firm’s resources are fixed
![Page 24: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/24.jpg)
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What is the long run?A period during which all your resources under your firm’s control are variable
![Page 25: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/25.jpg)
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VariableResource(labor per day)012345678
TotalProduct(Tons per day)02591214151514
MarginalProduct(Tons per day)-2343210-1
The short run relationship between units of labor and tons of furniture moved
Exhibit 2
![Page 26: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/26.jpg)
26
What is mymarginal product?
The change in your total product that occurs when the usage of a resource increases by one unit, all other resources constant
![Page 27: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/27.jpg)
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What is increasing marginal returns?
This occurs when your marginal product increases as more units of a resource are employed, all other resources constant
![Page 28: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/28.jpg)
28
What is the law of diminishing marginal
returns?As more units of a variable
resource are combined with a given amount of fixed resources, eventually the additional units will yield a smaller marginal product
![Page 29: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/29.jpg)
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Tot
al P
rod
uct
5
10
15
543210M
argi
nal
Pro
du
ct
5 10
Exh
ibit 3: T
he T
otal and
M
arginal P
rodu
ct of Lab
or
5 10
Increasing marginal returns
Diminishing but positive marginal returns
Negative marginal returns
![Page 30: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/30.jpg)
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Qtons0259121415
Short-Run Cost Data for the Smoother Mover
FC$200$200$200$200$200$200$200
Qworkers0123456
VC$0$100$200$300$400$500$600
TC$200$300$400$500$600$700$800
MC-
$50.00$33.33$25.00$33.33$50.00$100.00
Exhibit 4
![Page 31: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/31.jpg)
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When marginal cost increases, does
average cost increase?If MC is > than the average,
the average will increaseIf MC is < the average, the
average will decrease
![Page 32: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/32.jpg)
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Tot
al d
olla
rsC
ost
per
ton
$200
$500
Fixed cost
Variable cost
Total cost
Fixed cost
5 10 15 Tons per day
2550
5 10 15
Marginal Cost
Exhibit 5
![Page 33: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/33.jpg)
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What is average fixed cost?
Fixed cost divided by output
FC / Q
![Page 34: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/34.jpg)
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What is average variable cost?Variable cost divided by Q
VC / Q
![Page 35: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/35.jpg)
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What is average total cost?
Sum of average fixed cost and average variable cost
AFC + AVC
![Page 36: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/36.jpg)
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Q0259
121415
Short-Run Cost Data for the Hypothetical Firm
VC$0
100200300400500600
AFC
$10040.0022.2216.6714.2913.33
AVC-
$50.0040.0033.3333.3335.7140.00
TC$200$300$400$500$600$700$800
MC-
$50.00$33.33$25.00$33.33$50.00
$100.00Exhibit 6
ATC-
$150.0080.0055.5550.0050.0053.33
![Page 37: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/37.jpg)
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Marginal Cost
Average Variable Cost
Average Fixed Cost
P
QExhibit 7
Average Total Cost
Average & Marginal Cost Curves
![Page 38: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/38.jpg)
38
What is thelong-run
average cost curve?A curve indicating the lowest average cost of production at each level of output when the firm’s size is allowed to vary
![Page 39: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/39.jpg)
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$
Q
S M
a S1 L L1b
M1
0 q qaq1 qb
Short-Run Average Cost Curves and the Long-Run Planning Curve
Exhibit 8
![Page 40: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/40.jpg)
40
$
Q
ATC1ATC2ATC3
ATC6ATC4ATC5
ATC7
Family of Many Short-Run Cost Curves Forming a Firm’s Long-Run Planning Curve
Exhibit 9
![Page 41: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/41.jpg)
41
What are economies of scale?
Forces that cause reduction in a firm’s average cost as the scale of operation increases in the long run
![Page 42: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/42.jpg)
42
What are diseconomies of scale?Forces that cause a firm’s average cost to increase as the scale of operation increases in the long run
![Page 43: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/43.jpg)
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Costs in the Long Run and Economies of Scale
Output
Cos
t p
er U
nit AC
Economiesof scale
Diseconomiesof scale
![Page 44: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/44.jpg)
44
What is the minimum efficient scale?
The lowest rate of output at which a firm takes full advantage of economies of scale
![Page 45: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/45.jpg)
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A BEconomies
of ScaleConstant Average
CostDiseconomies
of Scale
Long-run average cost curve
$
Q
Exhibit 10
![Page 46: 1 Chapter 7 Production and Cost of the Firm These slides supplement the textbook, but should not replace reading the textbook.](https://reader030.fdocuments.in/reader030/viewer/2022032708/56649e605503460f94b5b88f/html5/thumbnails/46.jpg)
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END