The Costs of Production: Unit 10
The Costs of Production: Unit 10
The Costs of Production: Unit 10
UNIT 10
What may be the objective of a firm?
Harcourt
The Costs of Production
Economic
profit
Implicit
Revenue costs
Total
opportunity
costs
Explicit
costs
Economic Profit versus
Accounting Profit
How an Economist How an Accountant
Views a Firm Views a Firm
Economic
profit
Accounting
profit
Implicit
Revenue costs Revenue
Total
opportunity
costs
Explicit Explicit
costs costs
Production and Costs
Add
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Diminishing Marginal Product
Quantity of
Output
(cakes
per hour)
150 Production function
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0 1 2 3 4 5 Number of Workers Hired
Production Function and Total
Costs
Total Marginal
Number of Output Cost of Cost of Total Cost
Workers (Quantity) Product of Factory Workers of Inputs
Labour FC VC TC
0 0 $30 $0 $30
1 50 50 30 10 40
2 90 40 30 20 50
3 120 30 30 30 60
4 140 20 30 40 70
5 150 10 30 50 80
Total-Cost Curve
Total
Cost
$80 Total-cost
curve
70
60
50
40
30
20
10
TC = TFC + TVC
Family of Total Costs
Fixed cost FC
AFC = =
Quantity Q
Variable cost VC
AVC = =
Quantity Q
Total cost TC
ATC = =
Quantity Q
Family of Average Costs
= TC
Q
Marginal Cost
Quantity Total Cost Marginal Cost Quantity Total Cost Marginal Cost
0 $3.00 —
1 3.30 $0.30 6 $7.80 $1.30
2 3.80 0.50 7 9.30 1.50
3 4.50 0.70 8 11.00 1.70
4 5.40 0.90 9 12.90 1.90
5 6.50 1.10 10 15.00 2.10
Cost Curves and Their Shapes
Costs
$3.00
2.75
2.50
2.25 MC
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity of Output
(bagels per hour)
Cost Curves and Their Shapes
Costs
$3.00
2.75
2.50
2.25
2.00
1.75
1.50
ATC
1.25
1.00 AVC
0.75
0.50
0.25
AFC
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity of Output
(bagels per hour)
Relationship Between Marginal Cost
and Average Total Cost
Costs
$3.00
2.75
2.50
2.25
2.00
1.75
1.50
ATC
1.25
1.00
0.75
0.50
0.25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity of Output
(bagels per hour)
Relationship Between Marginal Cost
and Average Total Cost
Costs
$3.00
2.75
2.50
2.25 MC
2.00
1.75
1.50
ATC
1.25
1.00
0.75
0.50
0.25
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity of Output
(bagels per hour)
Costs in the Long Run
Average
Total ATC in short ATC in short ATC in short
Cost run with run with run with
small factory medium factory large factory
0 Quantity of
Cars per Day
U-Shaped Long-Run Average
Total Cost
Average
Total
Cost
ATC in long run
Economies Constant
of scale returns to
scale
Diseconomies
of scale
0 Quantity of
Cars per Day
Conclusion
Quantity Total Cost Marginal Cost Quantity Total Cost Marginal Cost
0 $4.00 — - - -
1 4.30 6 $8.80
2 4.80 7 10.30
3 5.50 8 12.00
4 6.40 9 13.90
5 7.50 10 16.00
Harcourt
What would be the possible Variable
Cost for the following units?
Quantity Total Cost Fixed Cost Variable Cost
0 $ 2.00 $2.00 $
1 2.30 2.00
2 2.80 2.00
3 3.50 2.00
4 4.40 2.00
5 5.50 2.00
6 6.80 2.00
7 8.30 2.00
8 10.00 2.00
9 11.90 2.00
10 14.00 Harcourt 2.00
Shapes of curves
Harcourt
Why does variable cost decrease
at first?
Harcourt