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Transcript of 1 Module 14 Cost in the Short Run. ObjectivesObjectives Understand the relationship between the...
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Module 14Module 14Module 14Module 14
Cost in the Short Cost in the Short RunRun
Cost in the Short Cost in the Short RunRun
ObjectivesObjectivesObjectivesObjectives
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
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ObjectivesObjectivesObjectivesObjectives
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
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ObjectivesObjectivesObjectivesObjectives
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Define average total cost, average variable cost, Define average total cost, average variable cost, average fixed cost and marginal cost.average fixed cost and marginal cost.
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Define average total cost, average variable cost, Define average total cost, average variable cost, average fixed cost and marginal cost.average fixed cost and marginal cost.
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ObjectivesObjectivesObjectivesObjectives
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Define average total cost, average variable cost, Define average total cost, average variable cost, average fixed cost and marginal cost.average fixed cost and marginal cost.
Know and be able to use the cost formulas to Know and be able to use the cost formulas to calculate costs.calculate costs.
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Define average total cost, average variable cost, Define average total cost, average variable cost, average fixed cost and marginal cost.average fixed cost and marginal cost.
Know and be able to use the cost formulas to Know and be able to use the cost formulas to calculate costs.calculate costs.
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ObjectivesObjectivesObjectivesObjectives
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Define average total cost, average variable cost, Define average total cost, average variable cost, average fixed cost and marginal cost.average fixed cost and marginal cost.
Know and be able to use the cost formulas to Know and be able to use the cost formulas to calculate costs.calculate costs.
Understand the relationship between marginal Understand the relationship between marginal product and marginal cost of production.product and marginal cost of production.
Understand the relationship between the short run Understand the relationship between the short run production function and short run costs.production function and short run costs.
Define total cost, total variable cost and total fixed Define total cost, total variable cost and total fixed cost.cost.
Define average total cost, average variable cost, Define average total cost, average variable cost, average fixed cost and marginal cost.average fixed cost and marginal cost.
Know and be able to use the cost formulas to Know and be able to use the cost formulas to calculate costs.calculate costs.
Understand the relationship between marginal Understand the relationship between marginal product and marginal cost of production.product and marginal cost of production.
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Understand the relationship between marginal cost Understand the relationship between marginal cost and average total cost, and marginal cost and and average total cost, and marginal cost and average variable cost.average variable cost.
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Objectives continuedObjectives continuedObjectives continuedObjectives continued
Understand the relationship between marginal cost Understand the relationship between marginal cost and average total cost, and marginal cost and and average total cost, and marginal cost and average variable cost.average variable cost.
Understand what happens to average fixed cost as Understand what happens to average fixed cost as output increases and what this implies about the output increases and what this implies about the average total cost and average variable cost curves. average total cost and average variable cost curves.
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Objectives continuedObjectives continuedObjectives continuedObjectives continued
Understand the relationship between marginal cost Understand the relationship between marginal cost and average total cost, and marginal cost and and average total cost, and marginal cost and average variable cost.average variable cost.
Understand what happens to average fixed cost as Understand what happens to average fixed cost as output increases and what this implies about the output increases and what this implies about the average total cost and average variable cost curves. average total cost and average variable cost curves.
Be able to graph the cost curves. Be able to graph the cost curves.
Understand the relationship between marginal cost Understand the relationship between marginal cost and average total cost, and marginal cost and and average total cost, and marginal cost and average variable cost.average variable cost.
Understand what happens to average fixed cost as Understand what happens to average fixed cost as output increases and what this implies about the output increases and what this implies about the average total cost and average variable cost curves. average total cost and average variable cost curves.
Be able to graph the cost curves. Be able to graph the cost curves.
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Objectives continuedObjectives continuedObjectives continuedObjectives continued
Costs are derived from the production function.Costs are derived from the production function.
Objective 1Objective 1Objective 1Objective 1
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Understand the relationship between the short Understand the relationship between the short run production function and short run costsrun production function and short run costsUnderstand the relationship between the short Understand the relationship between the short run production function and short run costsrun production function and short run costs
Costs are derived from the production function.Costs are derived from the production function.
Consider a simple 2-input short run production function,Consider a simple 2-input short run production function,like the one we used for the Acme Box Company:like the one we used for the Acme Box Company:
Q = f (L, KQ = f (L, K00))
where L= the variable input, labor and Kwhere L= the variable input, labor and K00 = the fixed = the fixed input, capital.input, capital.
Objective 1Objective 1Objective 1Objective 1
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Understand the relationship between the short Understand the relationship between the short run production function and short run costsrun production function and short run costsUnderstand the relationship between the short Understand the relationship between the short run production function and short run costsrun production function and short run costs
Costs are derived from the production function.Costs are derived from the production function.
Consider a simple 2-input short run production function,Consider a simple 2-input short run production function,like the one we used for the Acme Box Company:like the one we used for the Acme Box Company:
Q = f (L, KQ = f (L, K00))
where L= the variable input, labor and Kwhere L= the variable input, labor and K00 = the fixed = the fixed input, capital.input, capital.
From the production function, we can write an From the production function, we can write an expression for total cost.expression for total cost.
Total Cost = Labor Costs + Capital CostTotal Cost = Labor Costs + Capital Cost = Total Variable Cost + Total Fixed Cost= Total Variable Cost + Total Fixed Cost
Objective 1Objective 1Objective 1Objective 1
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Understand the relationship between the short Understand the relationship between the short run production function and short run costsrun production function and short run costsUnderstand the relationship between the short Understand the relationship between the short run production function and short run costsrun 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 2Objective 2Objective 2Objective 2
Define Total Fixed Cost …Define Total Fixed Cost …Define Total Fixed Cost …Define Total Fixed Cost …
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Total Fixed Costs (TFC)Total Fixed Costs (TFC) refer 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 overheadsoverheads.
Objective 2Objective 2Objective 2Objective 2
Define Total Fixed Cost …Define Total Fixed Cost …Define Total Fixed Cost …Define Total Fixed Cost …
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Total Fixed Costs (TFC)Total Fixed Costs (TFC) refers to the total expenditure refers to the total expenditure by the firm for fixed inputs. by the firm for fixed inputs.
Fixed costs do not change when firms increase or Fixed costs do not change when firms increase or decrease their output. The lay person thinks of fixed decrease their output. The lay person thinks of fixed costs as costs as overheadsoverheads. .
Objective 2Objective 2Objective 2Objective 2
Define Total Fixed Cost …Define Total Fixed Cost …Define Total Fixed Cost …Define Total Fixed Cost …
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Total Variable CostsTotal Variable Costs (TVC) (TVC) refer to total expenditure refer to total expenditure on variable inputs, for example, the wages paid for on variable inputs, for example, the wages paid for labor services and the cost of raw materials labor services and the cost of raw materials purchased to produce the product. purchased to produce the product.
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Objective 2: … total variable cost and total costObjective 2: … total variable cost and total costObjective 2: … total variable cost and total costObjective 2: … total variable cost and total cost
Total Variable CostsTotal Variable Costs (TVC) (TVC) refer to total expenditure refer to total expenditure on variable inputs, for example, the wages paid for on variable inputs, for example, the wages paid for labor services and the cost of raw materials labor services and the cost of raw materials purchased to produce the product. purchased to produce the product.
Total CostsTotal Costs (TC) (TC) refer to therefer to the total expenditure on all total expenditure on all inputs used to produce a product. It is the sum of inputs used to produce a product. It is the sum of fixed costs and variable costs.fixed costs and variable costs.
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Objective 2: … total variable cost and total costObjective 2: … total variable cost and total costObjective 2: … total variable cost and total costObjective 2: … total variable cost and total cost
Objective 2: … fixed cost, variable cost and Objective 2: … fixed cost, variable cost and total costtotal cost
Objective 2: … fixed cost, variable cost and Objective 2: … fixed cost, variable cost and total costtotal cost
Total Cost = Total Fixed Cost + Total Variable CostTotal Cost = Total Fixed Cost + Total Variable Cost
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Objective 3Objective 3Objective 3Objective 3
Average costsAverage costs tells you how much a product costs per tells you how much a product costs per unit of output. In the short run, there are three average unit of output. In the short run, there are three average cost variables,cost variables, one corresponding to each category of one corresponding to each category of costs.costs.
Define average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal costDefine average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal cost
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Objective 3Objective 3Objective 3Objective 3
Average costsAverage costs tells you how much a product costs per tells you how much a product costs per unit of output. In the short run, there are three average unit of output. In the short run, there are three average cost variables,cost variables, one corresponding to each category of one corresponding to each category of costs.costs.
1.1. Average Fixed cost (AFC)Average Fixed cost (AFC)
Define average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal costDefine average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal cost
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Objective 3Objective 3Objective 3Objective 3
Average costsAverage costs tells you how much a product costs per tells you how much a product costs per unit of output. In the short run, there are three average unit of output. In the short run, there are three average cost variables,cost variables, one corresponding to each category of one corresponding to each category of costs.costs.
1.1. Average Fixed cost (AFC)Average Fixed cost (AFC)
2.2. Average Variable Cost (AVC)Average Variable Cost (AVC)
Define average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal costDefine average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal cost
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Objective 3Objective 3Objective 3Objective 3
Average costsAverage costs tells you how much a product costs per tells you how much a product costs per unit of output. In the short run, there are three average unit of output. In the short run, there are three average cost variables,cost variables, one corresponding to each category of one corresponding to each category of costs.costs.
1.1. Average Fixed cost (AFC)Average Fixed cost (AFC)
2.2. Average Variable Cost (AVC)Average Variable Cost (AVC)
3.3. Average Total Cost (ATC) or simply Average Cost Average Total Cost (ATC) or simply Average Cost (AC)(AC)
Define average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal costDefine average total cost, average variable cost, average Define average total cost, average variable cost, average fixed cost and marginal costfixed cost and marginal cost
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Total Cost = Average Total Cost Total Cost = Average Total Cost Quantity Quantity
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Total CostAverage Total Cost =Quantity
Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..
Total Cost = Average Total Cost Total Cost = Average Total Cost Quantity Quantity
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Total CostAverage Total Cost =Quantity
Total Cost Fixed Cost Variable Cost= +Quantity Quantity Quantity
Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..
Total Cost = Average Total Cost Total Cost = Average Total Cost Quantity Quantity
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Total CostAverage Total Cost =Quantity
Total Cost Fixed Cost Variable Cost= +Quantity Quantity Quantity
Average Average Average Total = Fixed + Variable Cost Cost Cost
Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..Objective 3: … the three “average” cost variables..
Marginal CostMarginal Cost is the addition to total cost resulting from producing one more unit of output.
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Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost
Marginal CostMarginal Cost is the addition to total cost resulting from producing one more unit of output.
ΔTotal CostMarginal Cost =ΔQuantity
Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost
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Marginal CostMarginal Cost is the addition to total cost resulting from producing one more unit of output.
ΔTotal CostMarginal Cost =ΔQuantity
= +ΔTotal Cost ΔFixed Cost ΔVariable CostMarginal Cost =ΔQuantity ΔQuantity ΔQuantity
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Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost
Marginal CostMarginal Cost is the addition to total cost resulting from producing one more unit of output.
Since fixed cost is constant, the equation above equals:Since fixed cost is constant, the equation above equals:
ΔTotal CostMarginal Cost =ΔQuantity
= +ΔTotal Cost ΔFixed Cost ΔVariable CostMarginal Cost =ΔQuantity ΔQuantity ΔQuantity
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Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost
=ΔTotal Cost ΔVariable CostMarginal Cost =ΔQuantity ΔQuantity
Marginal CostMarginal Cost is the addition to total cost resulting from producing one more unit of output.
Since fixed cost is constant, the equation above equals:Since fixed cost is constant, the equation above equals:
ΔTotal CostMarginal Cost =ΔQuantity
= +ΔTotal Cost ΔFixed Cost ΔVariable CostMarginal Cost =ΔQuantity ΔQuantity ΔQuantity
In the In the short runshort run,, marginal cost is independent of fixed marginal cost is independent of fixed costs. costs.
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Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost Objective 3: … define marginal cost
=ΔTotal Cost ΔVariable CostMarginal Cost =ΔQuantity ΔQuantity
Objective 4Objective 4 Objective 4Objective 4 Know and be able to use the cost formulas to Know and be able to use the cost formulas to
calculate costs calculate costs Know and be able to use the cost formulas to Know and be able to use the cost formulas to
calculate costs calculate costs
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Objective 4Objective 4 Objective 4Objective 4
Example:Example: We will revisit the Acme Box Company. We will revisit the Acme Box Company. Suppose Acme’s Fixed Costs equals $1,000 and the Suppose Acme’s Fixed Costs equals $1,000 and the firm hires labor at a constant wage of $60 per unit. firm hires labor at a constant wage of $60 per unit.
Know and be able to use the cost formulas to Know and be able to use the cost formulas to calculate costs calculate costs
Know and be able to use the cost formulas to Know and be able to use the cost formulas to calculate costs calculate costs
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Suppose Acme’s fixed costs equals $1,000. Suppose Acme’s fixed costs equals $1,000.
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
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(1) (2) (3) (4)
LaborLabor(L)(L)
Total Total ProductProduct
(Q)(Q)
Marginal Marginal Product Product
(MPL)(MPL)
Total Fixed Total Fixed Cost (TFC)Cost (TFC)
$$
0 0 0 1000
1 8 8 1000
2 23 15 1000
3 42 19 1000
4 57 15 1000
5 67 10 1000
6 74 7 1000
7 79 5 1000
8 82 3 1000
9 83 1 1000
Acme’sAcme’s hires labor at a constant wage of $60 per unit of labor. hires labor at a constant wage of $60 per unit of labor. Its labor costs are its only variable costs.Its labor costs are its only variable costs.
Labor Costs = Variable Costs = wage rate Labor Costs = Variable Costs = wage rate labor units labor units
(1) (2) (3) (4) (5)=(1)x$60
LaborLabor(L)(L)
Total Total ProductProduct
(Q)(Q)
Marginal Marginal Product Product
(MPL)(MPL)
Total Fixed Total Fixed Cost (TFC)Cost (TFC)
$$
Total Variable Total Variable Cost (TVC)Cost (TVC)
$$
0 0 0 1000 0
1 8 8 1000 1x60=60
2 23 15 1000 2x60=120
3 42 19 1000 3x60=180
4 57 15 1000 240
5 67 10 1000 300
6 74 7 1000 360
7 79 5 1000 420
8 82 3 1000 480
9 83 1 1000 54035
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
Acme’s Total Cost = Fixed Cost + Variable CostAcme’s Total Cost = Fixed Cost + Variable Cost
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
(1) (2) (3) (4) (5) (6)=(4) +(5)(6)=(4) +(5)
LaborLabor(L)(L)
Total Total ProductProduct
(Q)(Q)
Marginal Marginal Product Product
(MPL)(MPL)
Total Fixed Total Fixed Cost (TFC)Cost (TFC)
$$
Total Variable Total Variable Cost (TVC)Cost (TVC)
$$
Total Cost Total Cost
(TC)(TC)
$$
0 0 0 1000 0 1000
1 8 8 1000 60 1000+60=1060
2 23 15 1000 120 1000+120=1120
3 42 19 1000 180 1000+180=1180
4 57 15 1000 240 1240
5 67 10 1000 300 1300
6 74 7 1000 360 1360
7 79 5 1000 420 1420
8 82 3 1000 480 1480
9 83 1 1000 540 1540
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Average Fixed Cost = Fixed Cost ÷ OutputAverage Fixed Cost = Fixed Cost ÷ Output
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
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(1) (2) (3) (4) (5) (6)=(4) +(5)(6)=(4) +(5) (7)=(4) (7)=(4) ÷(2)(2)
LaborLabor(L)(L)
Total Total Product orProduct or
Output (Q)Output (Q)
Marginal Marginal Product Product
(MPL)(MPL)
Total Fixed Total Fixed Cost (TFC)Cost (TFC)
$$
Total Variable Total Variable Cost (TVC) Cost (TVC)
$$
Total Cost Total Cost
(TC)(TC)
$$
Average Fixed Average Fixed Cost (AFC)Cost (AFC)
$$
0 0 0 1000 0 1000 ----
1 8 8 1000 60 1060 1000 ÷8=125
2 23 15 1000 120 1120 1000 ÷23=43.5
3 42 19 1000 180 1180 1000 ÷42=23.8
4 57 15 1000 240 1240 17.5
5 67 10 1000 300 1300 14.9
6 74 7 1000 360 1360 13.5
7 79 5 1000 420 1420 12.7
8 82 3 1000 480 1480 12.2
9 83 1 1000 540 1540 12.1
Average Variable Cost = Total Variable Cost ÷ OutputAverage Variable Cost = Total Variable Cost ÷ Output
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
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(1) (2) (3) (4) (5) (6)(6) (7)(7) (8)=(5) ÷(2)(8)=(5) ÷(2)
LaborLabor(L)(L)
Total Total Product orProduct orOutput (Q)Output (Q)
Marginal Marginal Product Product (MPL)(MPL)
Total Fixed Total Fixed Cost (TFC)Cost (TFC)
$$
Total Variable Total Variable Cost (TVC) Cost (TVC)
$$
Total Cost Total Cost (TC)(TC)
$$
Average Average Fixed Cost Fixed Cost (AFC in $) (AFC in $)
Average Variable Average Variable Cost (AVC in $)Cost (AVC in $)
0 0 0 1000 0 1000 ---- 0
1 8 8 1000 60 1060 125 60 ÷8=7.5
2 23 15 1000 120 1120 43.5 120 ÷23=5.2
3 42 19 1000 180 1180 23.8 180 ÷42=4.3
4 57 15 1000 240 1240 17.5 4.2
5 67 10 1000 300 1300 14.9 4.5
6 74 7 1000 360 1360 13.5 4.9
7 79 5 1000 420 1420 12.7 5.3
8 82 3 1000 480 1480 12.2 5.9
9 83 1 1000 540 1540 12.1 6.5
Average Total Cost = Average Fixed Cost + Average Variable Cost, orAverage Total Cost = Average Fixed Cost + Average Variable Cost, orAverage Total Cost = Total Cost ÷ OutputAverage Total Cost = Total Cost ÷ Output
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
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(1) (2) (3) (4) (5) (6)(6) (7)(7) (8)(8) (9)=(6) (9)=(6) ÷(2)(2)
LaborLabor(L)(L)
Total Total Product orProduct orOutput (Q)Output (Q)
Marginal Marginal Product Product (MPL)(MPL)
Total Fixed Total Fixed Cost (TFC)Cost (TFC)
$$
Total Variable Total Variable Cost (TVC) Cost (TVC)
$$
Total Cost Total Cost (TC)(TC)
$$
Average Average Fixed Cost Fixed Cost (AFC in $)(AFC in $)
Average Average Variable Cost Variable Cost
(AVC in $)(AVC in $)
Average Total Average Total Cost (ATC in Cost (ATC in
$)$)
0 0 0 1000 0 1000 ---- 0 ----
1 8 8 1000 60 1060 125 60 ÷8=7.5 1060÷ 8=132.5
2 23 15 1000 120 1120 43.5 120 ÷23=5.2 1120 ÷23=48.7
3 42 19 1000 180 1180 23.8 180 ÷42=4.3 1180 ÷ 42=28.1
4 57 15 1000 240 1240 17.5 4.2 21.8
5 67 10 1000 300 1300 14.9 4.5 19.4
6 74 7 1000 360 1360 13.5 4.9 18.4
7 79 5 1000 420 1420 12.7 5.3 18.0
8 82 3 1000 480 1480 12.2 5.9 18.1
9 83 1 1000 540 1540 12.1 6.5 18.5
Marginal Cost = Marginal Cost = ∆∆Total Cost ÷ Total Cost ÷ ∆∆Output, or in the short run,Output, or in the short run,Marginal Cost = Marginal Cost = ∆∆Variable Cost ÷ Variable Cost ÷ ∆∆OutputOutput
Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …Objective 4: Calculating Costs …
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(1) (2) (3) (4) (5) (6)(6) (7)(7) (8)(8) (9)(9) (10)=∆(5)÷(3)(10)=∆(5)÷(3)
LaborLabor(L)(L)
Total Total Product orProduct orOutput (Q)Output (Q)
Marginal Marginal Product Product (MPL)(MPL)
Fixed Cost Fixed Cost (TFC)(TFC)
$$
Variable Variable Cost (TVC)Cost (TVC)
$$
TotalTotalCost Cost (TC)(TC)
$$
Average Average Fixed Cost Fixed Cost
(AFC) (AFC) $$
Average Average Variable Variable
Cost (AVC) Cost (AVC) $$
Average Average Total Cost Total Cost
(ATC) (ATC) $$
Marginal Cost Marginal Cost (MC) (MC)
$$
0 0 0 1000 0 1000 ---- 0 ---- ----
1 8 8 1000 60 1060 125 7.5 132.5 60÷ 8=7.5
2 23 15 1000 120 1120 43.5 5.2 48.7 60÷ 15=4
3 42 19 1000 180 1180 23.8 4.3 28.1 60÷ 19=3.2
4 57 15 1000 240 1240 17.5 4.2 21.8 4
5 67 10 1000 300 1300 14.9 4.5 19.4 6
6 74 7 1000 360 1360 13.5 4.9 18.4 8.6
7 79 5 1000 420 1420 12.7 5.3 18.0 12
8 82 3 1000 480 1480 12.2 5.9 18.1 20
9 83 1 1000 540 1540 12.1 6.5 18.5 60
Objective 5Objective 5Objective 5Objective 5
Understand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionUnderstand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
41
Objective 5Objective 5Objective 5Objective 5
Below is a segment of the Table for the Acme Box Company.Below is a segment of the Table for the Acme Box Company.
Understand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionUnderstand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
LaborLabor(L)(L)
Total Product Total Product or Output or Output
(Q)(Q)
Marginal Marginal Product Product
of Labor (MPL)of Labor (MPL)
Marginal Cost Marginal Cost (MC)(MC)
$$
0 0 0 ----
1 8 8 7.5
2 23 15 4
3 42 19 3.2
4 57 15 4
5 67 10 6
6 74 7 8.6
7 79 5 12
8 82 3 20
9 83 1 6042
(1) (2) (3) (4)
Objective 5Objective 5Objective 5Objective 5
Below is a segment of the Table for the Acme Box Company.Below is a segment of the Table for the Acme Box Company.
Understand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionUnderstand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
LaborLabor(L)(L)
Total Product Total Product or Output or Output
(Q)(Q)
Marginal Marginal Product Product
of Labor (MPL)of Labor (MPL)
Marginal Cost Marginal Cost (MC)(MC)
$$
0 0 0 ----
1 8 8 7.5
2 23 15 4
3 42 19 3.2
4 57 15 4
5 67 10 6
6 74 7 8.6
7 79 5 12
8 82 3 20
9 83 1 60
Increasing Increasing Marginal Marginal Returns Returns segmentsegment
43
Objective 5Objective 5Objective 5Objective 5
Below is a segment of the Table for the Acme Box Company.Below is a segment of the Table for the Acme Box Company.
Understand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionUnderstand the relationship between marginal Understand the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
LaborLabor(L)(L)
Total Product Total Product or Output or Output
(Q)(Q)
Marginal Marginal Product Product
of Labor (MPL)of Labor (MPL)
Marginal Cost Marginal Cost (MC)(MC)
$$
0 0 0 ----
1 8 8 7.5
2 23 15 4
3 42 19 3.2
4 57 15 4
5 67 10 6
6 74 7 8.6
7 79 5 12
8 82 3 20
9 83 1 60
Increasing Increasing Marginal Marginal Returns Returns segmentsegment
Diminishing Diminishing Marginal Marginal ReturnsReturnssegmentsegment
44
In the In the increasing marginal returnsincreasing marginal returns segment, when segment, when marginal product is rising, marginal cost is falling.marginal product is rising, marginal cost is falling.
Objective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionObjective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
45
In the In the increasing marginal returnsincreasing marginal returns segment, when segment, when marginal product is rising, marginal cost is falling.marginal product is rising, marginal cost is falling.
In the In the diminishing marginal returnsdiminishing marginal returns segment, when segment, when marginal product is falling, marginal cost is rising.marginal product is falling, marginal cost is rising.
Objective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionObjective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
46
In the In the increasing marginal returnsincreasing marginal returns segment, when segment, when marginal product is rising, marginal cost is falling.marginal product is rising, marginal cost is falling.
In the In the diminishing marginal returnsdiminishing marginal returns segment, when segment, when marginal product is falling, marginal cost is rising.marginal product is falling, marginal cost is rising.
In the In the negative marginal returnsnegative marginal returns segment, what do segment, what do you think is happening to marginal cost? Yes, it is you think is happening to marginal cost? Yes, it is rising fast!rising fast!
Objective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of productionObjective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
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What then is the shape of the marginal cost curve? What then is the shape of the marginal cost curve?
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Objective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
Objective 5: … the relationship between marginal Objective 5: … the relationship between marginal product and marginal cost of productionproduct and marginal cost of production
What then is the shape of the marginal cost curve? What then is the shape of the marginal cost curve? It is U-shaped.It is U-shaped.
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Objective 6: … the relationship between marginal product Objective 6: … the relationship between marginal product and marginal costand marginal costObjective 6: … the relationship between marginal product Objective 6: … the relationship between marginal product and marginal costand marginal cost
Objective 6Objective 6Objective 6Objective 6
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
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Objective 6Objective 6Objective 6Objective 6
When marginal cost (MC) is When marginal cost (MC) is lessless than either average than either average total cost (ATC) or average variable cost (AVC), it total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.causes ATC or AVC to fall.
When marginal cost (MC) is When marginal cost (MC) is lessless than either average than either average total cost (ATC) or average variable cost (AVC), it total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.causes ATC or AVC to fall.
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
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Objective 6Objective 6Objective 6Objective 6
When marginal cost (MC) is When marginal cost (MC) is lessless than either average than either average total cost (ATC) or average variable cost (AVC), it total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.causes ATC or AVC to fall.
When MC is When MC is greatergreater than either ATC or AVC, it than either ATC or AVC, it causes ATC or AVC to rise.causes ATC or AVC to rise.
When marginal cost (MC) is When marginal cost (MC) is lessless than either average than either average total cost (ATC) or average variable cost (AVC), it total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.causes ATC or AVC to fall.
When MC is When MC is greatergreater than either ATC or AVC, it than either ATC or AVC, it causes ATC or AVC to rise.causes ATC or AVC to rise.
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
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Objective 6Objective 6Objective 6Objective 6
When marginal cost (MC) is When marginal cost (MC) is lessless than either average than either average total cost (ATC) or average variable cost (AVC), it total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.causes ATC or AVC to fall.
When MC is When MC is greatergreater than either ATC or AVC, it than either ATC or AVC, it causes ATC or AVC to rise.causes ATC or AVC to rise.
The MC curve The MC curve intersectsintersects both the AVC and ATC both the AVC and ATC curves at their respective minimum points.curves at their respective minimum points.
When marginal cost (MC) is When marginal cost (MC) is lessless than either average than either average total cost (ATC) or average variable cost (AVC), it total cost (ATC) or average variable cost (AVC), it causes ATC or AVC to fall.causes ATC or AVC to fall.
When MC is When MC is greatergreater than either ATC or AVC, it than either ATC or AVC, it causes ATC or AVC to rise.causes ATC or AVC to rise.
The MC curve The MC curve intersectsintersects both the AVC and ATC both the AVC and ATC curves at their respective minimum points.curves at their respective minimum points.
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
Understand the relationship between marginal cost,Understand the relationship between marginal cost, average total cost, and average variable costaverage total cost, and average variable cost
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The average total cost and average variable curves The average total cost and average variable curves are also U-shaped.are also U-shaped.
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Objective 6: … the marginal cost, average total cost and Objective 6: … the marginal cost, average total cost and average variable cost curvesaverage variable cost curvesObjective 6: … the marginal cost, average total cost and Objective 6: … the marginal cost, average total cost and average variable cost curvesaverage variable cost curves
The average total cost and average variable curves The average total cost and average variable curves are also U-shaped.are also U-shaped.
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Objective 6: … the marginal cost, average total cost and Objective 6: … the marginal cost, average total cost and average variable cost curvesaverage variable cost curvesObjective 6: … the marginal cost, average total cost and Objective 6: … the marginal cost, average total cost and average variable cost curvesaverage variable cost curves
Like the marginal cost curve, their shapes are also Like the marginal cost curve, their shapes are also influenced by the law of diminishing marginal returns.influenced by the law of diminishing marginal returns.
Objective 7Objective 7Objective 7Objective 7Understand what happens to average fixed Understand what happens to average fixed
cost as output increasescost as output increases.Understand what happens to average fixed Understand what happens to average fixed
cost as output increasescost as output increases.
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Average fixed costs falls as output increases.....think of this as “spreading your overheads”. Average fixed costs falls as output increases.....think of this as “spreading your overheads”.
Objective 7Objective 7Objective 7Objective 7Understand what happens to average fixed Understand what happens to average fixed
cost as output increasescost as output increases.Understand what happens to average fixed Understand what happens to average fixed
cost as output increasescost as output increases.
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Fixed CostAverage Fixed Cost =Quantity
ATC = AVC + AFC ATC = AVC + AFC AFC = ATC – AVCAFC = ATC – AVC
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If average fixed cost falls as output increases, If average fixed cost falls as output increases, what does this imply about the average what does this imply about the average variable cost and average total cost curves?variable cost and average total cost curves?
ATC = AVC + AFC ATC = AVC + AFC
AFC = ATC – AVCAFC = ATC – AVC
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As output expands, AFC gets smaller and smaller, As output expands, AFC gets smaller and smaller, which means that the difference between the ATC which means that the difference between the ATC and the AVC curves decreases. and the AVC curves decreases.
ATC = AVC + AFC ATC = AVC + AFC
AFC = ATC – AVCAFC = ATC – AVC
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As output expands, AFC gets smaller and smaller, As output expands, AFC gets smaller and smaller, which means that the difference between the ATC which means that the difference between the ATC and the AVC curves decreases. and the AVC curves decreases.
Objective 8:Objective 8: Be able to graph the cost curvesBe able to graph the cost curvesObjective 8:Objective 8: Be able to graph the cost curvesBe able to graph the cost curves
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Graph the cost curves using the data for the Acme Graph the cost curves using the data for the Acme Box Company. Box Company.
Graph the cost curves using the data for the Acme Graph the cost curves using the data for the Acme Box Company. Box Company.
Objective 8:Objective 8: Be able to graph the cost curvesBe able to graph the cost curvesObjective 8:Objective 8: Be able to graph the cost curvesBe able to graph the cost curves
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(2) (4) (5) (6)(6) (7)(7) (8)(8) (9)(9) (10)=∆(5)÷(3)(10)=∆(5)÷(3)
Total Total Product orProduct orOutput (Q)Output (Q)
Fixed Cost Fixed Cost (TFC)(TFC)
$$
Variable Variable Cost (TVC)Cost (TVC)
$$
TotalTotalCost Cost (TC)(TC)
$$
Average Average Fixed Cost Fixed Cost
(AFC) (AFC) $$
Average Average Variable Variable
Cost (AVC) Cost (AVC) $$
Average Average Total Cost Total Cost
(ATC) (ATC) $$
Marginal Cost Marginal Cost (MC) (MC)
$$
0 1000 0 1000 ---- 0 ---- ----
8 1000 60 1060 125 7.5 132.5 7.5
23 1000 120 1120 43.5 5.2 48.7 4
42 1000 180 1180 23.8 4.3 28.1 3.2
57 1000 240 1240 17.5 4.2 21.8 4
67 1000 300 1300 14.9 4.5 19.4 6
74 1000 360 1360 13.5 4.9 18.4 8.6
79 1000 420 1420 12.7 5.3 18.0 12
82 1000 480 1480 12.2 5.9 18.1 20
83 1000 540 1540 12.1 6.5 18.5 60
Can you identify the curves in the diagram?Can you identify the curves in the diagram? Can you identify the curves in the diagram?Can you identify the curves in the diagram?
Objective 8:Objective 8: Be able to graph the cost curvesBe able to graph the cost curvesObjective 8:Objective 8: Be able to graph the cost curvesBe able to graph the cost curves
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E = Marginal Cost curve
a = minimum point on the marginal cost curve. Diminishing marginal returns set in at this point.
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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.
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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.
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You should be able to draw and identify these graphs.
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Objective 9:Objective 9: Be able to graph the cost curvesBe able to graph the cost curvesObjective 9:Objective 9: Be able to graph the cost curvesBe able to graph the cost curves