eFarmer.us Cost of Production

eFarmer.us - requires an outlay of money, - doesn’t require a cash outlay, ―paying wages ―paying rent ―paying interest ―the owner’s time ―the owner’s property ―the owner’s money lost wages forgone rental income forgone interest income payment to non owners for resources: Explicit costs Implicit costs opportunity cost:

eFarmer.us Shoe Co. Revenue$300,000 Explicit Cost $250,000 Accounting Profit Teacher $30,000 Economic Profit $20,000 Principal $50,000 Superintendent $100,000 $50,000 Worker Wages$100,000 Rent Expense$50,000 Leather Cost$100,000 Explicit $0Economic Profit- $50,000Economic Loss Implicit Accounting profit - total revenue minus total explicit costs Accounting profit ignores implicit costs and it’s always higher than economic profit. Economic profit - total revenue minus total costs (includes explicit and implicit costs)

eFarmer.us is a time period so short at least one input is fixed is a time period so long that all inputs can change ―Factory ―Special equipment ―Land Short Run Long Run Firms can build more factories or sell existing ones Cost for a fixed input is termed Fixed Cost

eFarmer.us Production Function - Hay Copyright 2009 eStudy.us Production Function shows the relationship between the level of inputs used to produce output ―Labor to cars ―Water to hay ―Grass to beef with at least one fixed input the production function is a short run concept

eFarmer.us Production Function - Hay Tractor and Wagon Implies Maximum Output per Worker Copyright 2009 eStudy.us Labor Hay per Hour A fixed resource - Production efficiency Marginal Product (MP): output produced by using one more variable input Diminishing Marginal Product MP increasing at a decreasing rate Diminishing Marginal Product 10 MP Hay Workers

eFarmer.us Short Run Cost of Production Copyright 2010 eStudy.us TFC $10 - Fixed Cost (TFC) Q $10 TVC $0 $4 $7 $11 $18 $28 $47 $74 $112 $162 TC $10 $14 $17 $21 $28 $38 $57 $84 $122 $172 MC $4 $3 $4 $7 $10 $19 $27 $38 $50 - Variable Cost (TVC) AFC -- $10.00 $5.00 $3.33 $2.50 $2.00 $1.67 $1.43 $1.25 $1.11 AVC -- $4.00 $3.50 $3.67 $4.50 $5.60 $7.83 $10.57 $14.00 $18.00 ATC -- $14.00 $8.50 $7.00 $7.60 $9.50 $12.00 $15.25 $ Total Cost (TC) costs that don’t vary as output changes costs that do vary as output changes TC = TFC + TVC - Marginal Cost (MC) the cost of producing one more output (Q)

eFarmer.us Cost of Production Calculation Equations Copyright 2010 eStudy.us at Q = 6

eFarmer.us Production Function - Hay Copyright 2009 eStudy.us Diminishing Marginal Product Using the hay example 0.32 Minimum marginal cost corresponds to maximum marginal product MP Hay Workers MC Hay $ TP Workers Hay

eFarmer.us Cost Curves Copyright 2010 eStudy.us MC AVC ATC $9.50 $7.83 $19.00 $1.67 AFC The MC curve intersects the ATC curve at minimum average total cost. —when MC < ATC, ATC falls as Q rises —when MC > ATC, ATC rises as Q rises $ Q

eFarmer.us Long Run Cost Curves Copyright 2010 eStudy.us Q $ Q $ Q $ LRAC ATC rises as Q increases Economies of scale ATC falls as Q increases Constant returns to scale ATC stays the same as Q increases Diseconomies of scale Owner’s can change any input, all costs are variable Telephone Industry Automotive Industry Diamond Industry