Chapter 8 Costs of Production 6/15/2018

What is a Fixed Cost? Cost to a firm that does not vary with the quantity of goods produced

What are examples of Fixed Costs? rent or mortgage a part of utilities

Fixed Cost is also known as….. Sunk Cost

What is a Variable Cost? Cost that varies with the quantity of goods produced

What are examples of Variable Costs? worker’s wages raw materials some utilities some taxes

What is Labor Productivity? The output per laborer per hour

Under what condition is it cheaper to pay $10 an hr. to a U. S Under what condition is it cheaper to pay $10 an hr. to a U.S. worker than $1 an hour to a foreign worker?

If the U.S. worker is more than 10 times as productive as the foreign worker

Why do labor costs per unit of output changes as more units of labor are hired? Price of labor increases Quality of labor decreases Labor productivity Changes

Why do non-labor, variable costs per unit of output increase as output increases? Resources become more scarce

Does the cost of all resources increase more than production increases? No, the costs of some resources may vary proportionately with the level of production

What is Total Variable Cost? The sum of specific variable costs in the firm’s cost structure

Total Variable Costs $ Q

What are Total Costs? Cost to the firm that includes both fixed and variable costs

TC Total Costs $ TVC TFC Q

What is Average Total Cost? Total cost divided by the quantity of goods produced

$ TC TVC 10 ATC = 9 5/2 = 2.5 8 7 6 5 ATC = 4 6/5 = 1.2 3 6 5 2 1 Q 1 2 3 4 5 6 7 8 9 10

$ 10 9 8 7 ATC 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

What is Average Variable Cost? Total variable cost divided by the quantity of goods produced

$ 10 9 TVC 8 7 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

$ 10 9 8 7 ATC 6 5 AVC 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

What is Average Fixed Cost? Total fixed cost divided by the quantity of goods produced

Costs AFC Quantity 2424

What is Marginal Cost? The change in total cost incurred by adding one more unit of output to production

If the only thing we observe is a change in total cost associated with a small change in output produced then MC is computed in the following way. MC = Q TC

$ TC 10 MC = 9 3/3 = 1 8 3 7 6 5 3 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

$ TC 10 9 8 7 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

TC, TVC, TFC TFC Q1 Q2 Q3 Q MC ATC AVC AFC Q

MC Costs Avg. Fixed Costs ATC AVC Quantity

Why does MC = ATC at minimum ATC? If the marginal is above the average, the average increases If the marginal is below the average, the average decreases

$ 10 MC 9 ATC 8 7 AVC 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

$ 10 MC 9 ATC 8 7 AVC 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10

What is the Short Run? A time in which producers can change some, but not all of its resources

What is the Long Run? The time in which producers can change quantity of all resources

Short-run Vs. Long-run Average Cost $ per unit of Output SRACD SRACC SRACA SRACB LRAC Q1 Q2 Q3 Q

What are Economies of Scale? When a firm increases resources in the long run and ATC decreases

What are Diseconomies of Scale? When a company increases resources in the long run and ATC increases