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Econ 206(A) Tutorial 5 Costs and Revenue. Cost Concepts 1.Fixed Costs. Do not vary with output (rent, plant etc) 2.Variable Costs. Vary with output (wages,

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Presentation on theme: "Econ 206(A) Tutorial 5 Costs and Revenue. Cost Concepts 1.Fixed Costs. Do not vary with output (rent, plant etc) 2.Variable Costs. Vary with output (wages,"— Presentation transcript:

1 Econ 206(A) Tutorial 5 Costs and Revenue

2 Cost Concepts 1.Fixed Costs. Do not vary with output (rent, plant etc) 2.Variable Costs. Vary with output (wages, raw materials etc) 3.Total Cost = Fixed Cost + Variable Cost

3 Totals, Averages and Marginals Total Cost (TC) = Average Cost (AC) * Quantity Produced (Q) Average Cost (AC) = Total Cost(TC)/Quantity(Q) Marginal Cost = The extra cost of producing one or more additional units of output. MC = ( TC / Q ); or MC = ( TCQ 2 – TCQ 1 )

4 Seminar Topic 1 1.Show How a Firms Short-run and Long-run Cost Curve Can be Derived From its Isoquant/Isocost Map

5 Output Expansion Path (long run) Labor (L) Capital (K) C0C0 C1C1 C2C2 Q0Q0 a b c Output Expansion Path Q1Q1 Q2Q2 C 1 > C 0 C 2 > Q 1 > Q 0 Q 2 > The output expansion path can be used to derive long run costs!

6 Long Run Total Cost Curve Output (Q) Cost Q0Q0 Q1Q1 Q2Q2 C0C0 C1C1 C2C2 a b c LTC

7 Output Expansion Path (short run) Labor (L) Capital (K) C0C0 C1C1 C2C2 Q0Q0 a b c Output Expansion Path Q1Q1 Q2Q2 C 1 > C 0 C 2 > Q 1 > Q 0 Q 2 > In the short run, K is constant. Diminishing MP L

8 Short Run Total Cost Curve Output (Q) Cost Q0Q0 Q1Q1 Q2Q2 C0C0 C1C1 C2C2 a b c STC LTC

9 Total Costs - Numerical TC(£)TVC(£)TFC (£)Output (Q)

10 Total Costs = TFC+TVC

11 Average and Marginal Costs MC(£)AC(£)TC (£)Output (Q)

12 Seminar Topic 2 Distinguish Between Internal and External Economies/Diseconomies of Scale.

13 Economies of scale Internal: –Decreases in the cost of production (increase in productivity) as output (q) of firm increases. External: –Decreases in cost of production (increase in productivity) as output (q) of industry increases. –Examples: Improved transport and communication links. Training and education becomes tailored to the industry (i.e. improved quality workers). Development of support firms and industries.

14 Revenue Total Revenue (TR ) = Quantity sold times price; P x Q Average Revenue (AR) = TR/Q; (in perfect competition this is P.) Marginal Revenue (MR) = MR = ( TR / Q ).

15 Revenue MRARTRQ

16 Seminar Topic 3 Explain Why Marginal Costs Must Equal Marginal Revenue for Profit Maximisation.

17 Profit Maximisation Profit ( )= TR – TC Largest when MR=MC. Intuition: –If MC>MR then TC is increasing quicker than TR. Hence profit is decreasing. –If MR>MC then an increase in Q will increase TR more than TC. Hence profit could be increased by producing more.

18 Profit Maximisation Rule – Numerical Example QMRMCTRTCProfit

19 Profit Maximisation Rule – Numerical Example (slight variant MC=MR) QMRMCTRTCProfit


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