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1、,The Costs of Production,Chapter 13,Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,The Costs of Producti
2、on,The Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. This results in a supply curve that slopes upward.,The Firms Objective,Maximum Profits,The economic goal of the firm is to maximize profits.,A Firms Total Revenue and Total Co
3、st,Total Revenue The amount that the firm receives for the sale of its output. Total Cost The amount that the firm pays to buy inputs.,A Firms Profit,Profit is the firms total revenue minus its total cost. Profit = Total revenue - Total cost,Costs as Opportunity Costs,A firms cost of production incl
4、udes all the opportunity costs of making its output of goods and services.,Explicit and Implicit Costs,A firms cost of production include explicit costs and implicit costs. Explicit costs involve a direct money outlay for factors of production. Implicit costs do not involve a direct money outlay.,Ec
5、onomic Profit versus Accounting Profit,Economists measure a firms economic profit as total revenue minus all the opportunity costs (explicit and implicit). Accountants measure the accounting profit as the firms total revenue minus only the firms explicit costs. In other words, they ignore the implic
6、it costs.,Economic Profit versus Accounting Profit,When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than accounting profit.,Economic Profit versus Accounting Profit,A Production Function and Total Cost,The Production Function,The
7、 production function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.,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.,M
8、arginal Product,Diminishing Marginal Product,Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production be
9、cause the firm has a limited amount of equipment.,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,0,1,2,3,4,5,Production function,Diminishing Marginal Product,The slope of the production function measures the mar
10、ginal product of an input, such as a worker. When the marginal product declines, the production function becomes flatter.,From the Production Function to the Total-Cost Curve,The relationship between the quantity a firm can produce and its costs determines pricing decisions. The total-cost curve sho
11、ws this relationship graphically.,A Production Function and Total Cost,Hungry Helens Cookie Factory,Total-Cost Curve.,Total,Cost,$80,70,60,50,40,30,20,10,Quantity of Output,(cookies per hour),0,20,40,140,120,100,80,60,Total-cost,curve,The Various Measures of Cost,Costs of production may be divided i
12、nto fixed costs and variable costs.,Fixed and Variable Costs,Fixed costs are those costs that do not vary with the quantity of output produced. Variable costs are those costs that do change as the firm alters the quantity of output produced.,Family of Total Costs,Total Fixed Costs (TFC) Total Variab
13、le Costs (TVC) Total Costs (TC) TC = TFC + TVC,Family of Total Costs,Quantity,Total Cost,Fixed Cost,Variable Cost,0,$ 3.00,$3.00,$ 0.00,1,3.30,3.00,0.30,2,3.80,3.00,0.80,3,4.50,3.00,1.50,4,5.40,3.00,2.40,5,6.50,3.00,3.50,6,7.80,3.00,4.80,7,9.30,3.00,6.30,8,11.00,3.00,8.00,9,12.90,3.00,9.90,10,15.00,
14、3.00,12.00,Average Costs,Average costs can be determined by dividing the firms costs by the quantity of output produced. The average cost is the cost of each typical unit of product.,Family of Average Costs,Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC) ATC = AFC +
15、AVC,Family of Average Costs,$3.00,Family of Average Costs,Quantity,AFC,AVC,ATC,0,1,$0.30,$3.30,2,1.50,0.40,1.90,3,1.00,0.50,1.50,4,0.75,0.60,1.35,5,0.60,0.70,1.30,6,0.50,0.80,1.30,7,0.43,0.90,1.33,8,0.38,1.00,1.38,9,0.33,1.10,1.43,10,0.30,1.20,1.50,Marginal Cost,Marginal cost (MC) measures the amount total cost rises when the firm increases production by one unit. Marginal cost helps answer the following question: How much does it cost to produce an additional unit of output?,Marginal Cost,Marginal Cost,Total-Cost Curve.,$0.00,$2.00,$4.00,$6.00,$8.00,$10.
