1. Tuesday Objective: 3.3 SWBAT analyze the behavior of per-unit and total cost curves. AY: Problem Set #3 due Thursday
Do Now: Calculate the Marginal Product and identify the 3 Stages of Return on the table below:
After which worker does this firm start to have diminishing marginal returns?
After which worker does this firm start to have negative marginal returns?
# of Workers
Total Product
Marginal Product 1 5 2 15 3 19 4 20 6

2. Do Now
Calculate the Marginal Product and identify the 3 Stages of Return on the table below:
Purple-Increasing Marginal returns
Aqua-Decreasing marginal returns
Purple-negative marginal returns
After which worker does this firm start to have diminishing marginal returns?
After the 2nd worker, at the 3rd worker
After which worker does this firm start to have negative marginal returns?
Starts to have negative marginal returns with the 6th worker
# of Workers
Total Product
Marginal Product  0 1 5  5 2 15
 10 3 19  4 4 20  1 6
 -1

3. Agenda
Do Now
3.3 Cost of Production
Practice

4. Production = Converting inputs into output

5. Definition of the “Short-Run”
We will look at both short-run and long-run production costs.
Short-run is NOT a set specific amount of time.
The short-run is a period in which at least one resource is fixed.
Plant capacity/size is NOT changeable
In the long-run ALL resources are variable
NO fixed resources
Plant capacity/size is changeable
Today we will examine short-run costs 5

6. Different Economic Costs
Total Costs
FC = Total Fixed Costs
VC = Total Variable Costs
TC = Total Costs
Per Unit Costs
AFC = Average Fixed Costs
AVC = Average Variable Costs
ATC = Average Total Costs
MC = Marginal Cost

7. Fixed vs. Variable (Review)
Fixed Resources- Resources that don’t change with the quantity produced
Ex: Table, scissors, and stapler
Variable Resources- Resources that do change with the quantity produced
Ex: Workers, paper, and staples
Identify three fixed resources and three variable resources for the link simulation we did in class. 7

8. Definitions Fixed Costs: Variable Costs:
Costs for fixed resources that DON’T change with the amount produced
Ex: Rent, Insurance, Managers Salaries, etc.
Average Fixed Costs =
Fixed Costs
Quantity
Variable Costs:
Costs for variable resources that DO change as more or less is produced
Ex: Raw Materials, Labor, Electricity, etc.
Average Variable Costs =
Variable Costs
Quantity

9. Definitions Total Cost: Marginal Cost: Sum of Fixed and Variable Costs
Average Total Cost =
Total Costs
Quantity
Marginal Cost:
Additional costs of an additional output.
Ex: If the production of two more output increases total cost from $100 to $120, the MC is _____.
$10
Marginal Cost =
Change in Total Costs
Change in Quantity

10. Calculating Costs $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 - Output
Variable
Cost
Fixed
Total
Marginal $0
$10 - 1 2
$17 3
$25 4
$40 5
$60 6
$110 -
$20 $5
$10
$12 $2
$14

11. Calculating Costs ATC of 6 Units AFC of 2 Units AVC of 4 Units
Output
Variable
Cost
Fixed
Total
Marginal $0
$10 - 1 2
$17 3
$25 4
$40 5
$60 6
$110
Fill out the chart then
calculate:
ATC of 6 Units
AFC of 2 Units
AVC of 4 Units
ATC of 1 Unit
AVC of 5 Units
AFC of 5 Units
ATC of 5 Units
$10
$10
$20
$27
$35
$50
$70
$120 -
$10 $7 $8
$15
$20
$50
$20 $5
$10
$12 $2
$14

12. Calculating Costs Notice that the AVC + AFC = ATC AVC AFC ATC
Output
Variable
Cost
Fixed
Total
Marginal $0
$10 - 1
$20 2
$17
$27 $7 3
$25
$35 $8 4
$40
$50
$15 5
$60
$70 6
$110
$120
AVC
AFC
ATC -
$20 $5
$10
$12 $2
$14
Notice that the AVC + AFC = ATC
For 5 Units: AVC ($12) + AFC ($2) = ATC ($14)
Is this is true for 4 Units?

13. Calculating Costs Notice that the AVC + AFC = ATC AVC AFC ATC
Output
Variable
Cost
Fixed
Total
Marginal $0
$10 - 1
$20 2
$17
$27 $7 3
$25
$35 $8 4
$40
$50
$15 5
$60
$70 6
$110
$120
AVC
AFC
ATC -
$10
$20
$8.50 $5
$13.50
$8.33
$3.33
$11.66
$2.50
$12.50
$12 $2
$14
$18.33
$1.67
$20 $5
$10
$12 $2
$14
Notice that the AVC + AFC = ATC
For 5 Units: AVC ($12) + AFC ($2) = ATC ($14)
Is this is true for 4 Units?

14. Calculating Costs ATC of 6 Units: $20 AFC of 2 Units: $5
Output
Variable
Cost
Fixed
Total
Marginal $0
$10 - 1 2
$17 3
$25 4
$40 5
$60 6
$110
Fill out the chart then
calculate:
ATC of 6 Units: $20
AFC of 2 Units: $5
AVC of 4 Units: $10
ATC of 1 Unit: $20
AVC of 5 Units: $12
AFC of 5 Units: $2
ATC of 5 Units: $14
$10
$10
$20
$27
$35
$50
$70
$120 -
$10 $7 $8
$15
$20
$50
$20 $5
$10
$12 $2
$14

15. Total Cost Curves TC
Costs
FC + VC = TC VC
Fixed Cost
$10 FC
Quantity

16. Calculating Costs AVC AFC ATC - $10 $20 $8.50 $5 $13.50 $8.33 $3.33
$11.66
$2.50
$12.50
$12 $2
$14
$18.33
$1.67
$20 $5
$10
$12 $2
$14

17. ATC and AVC get closer and closer but NEVER touchMC
Costs
ATC
$20
$18
$16
$14
$12
$10 $8 $6 $4 $2
AVC
ATC and AVC get closer and closer but NEVER touch
Average Fixed Cost
AFC
Quantity
Copyright
ACDC Leadership 2015

18. Practice 18

19. Calculating Costs $0 $20 - 1 $12 2 $22 3 $27 4 $40 5 $60 6 $100
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12 2
$22 3
$27 4
$40 5
$60 6
$100
8. ATC of 6 units:
9. AFC of 2 units:
10. AVC of 3 units:
11. ATC of 5 units:
12. AVC of 2 units:
13. AVC of 4 units:
14. AFC of 4 units:
15. ATC of 4 units:
$20 $5
$10
$12 $2
$14

20. Calculating Costs $0 $20 - 1 $12 $32 2 $22 $42 3 $27 $47 4 $40 $60 5
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12
$32 2
$22
$42 3
$27
$47 4
$40
$60 5
$80 6
$100
$120
8. ATC of 6 units:
9. AFC of 2 units:
10. AVC of 3 units:
11. ATC of 5 units:
12. AVC of 2 units:
13. AVC of 4 units:
14. AFC of 4 units:
15. ATC of 4 units:
$20 $5
$10
$12 $2
$14

21. Calculating Costs $0 $20 - 1 $12 $32 2 $22 $42 $10 3 $27 $47 $5 4 $40
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12
$32 2
$22
$42
$10 3
$27
$47 $5 4
$40
$60
$13 5
$80 6
$100
$120
8. ATC of 6 units:
9. AFC of 2 units:
10. AVC of 3 units:
11. ATC of 5 units:
12. AVC of 2 units:
13. AVC of 4 units:
14. AFC of 4 units:
15. ATC of 4 units:
$20 $5
$10
$12 $2
$14

22. Calculating Costs $0 $20 - 1 $12 $32 2 $22 $42 $10 3 $27 $47 $5 4 $40
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12
$32 2
$22
$42
$10 3
$27
$47 $5 4
$40
$60
$13 5
$80 6
$100
$120
8. ATC of 6 units: $20
9. AFC of 2 units: $10
10. AVC of 3 units: $9
11. ATC of 5 units: $16
12. AVC of 2 units: $11
13. AVC of 4 units: $10
14. AFC of 4 units: $5
15. ATC of 4 units: $15
$20 $5
$10
$12 $2
$14

23. Wednesday Obj. 3.4 Shapes of Cost Curves SWBAT analyze the relationship between the marginal cost curve and the marginal product curve. AY: Update notebook. Graphs Chart and Notecard due 3/18 *Summative* Due Tomorrow: Problem Set #3 Do Now: Draw a Supply and Demand graph that shows the market for grain and how it is affected by an excise tax imposed on production. What happens to price and quantity? Now draw the market for tortillas if grain is an input of tortillas. What happens to P and Q?

24. Agenda
Do Now
3.4 Shapes of Cost Curves
Practice
Problem Set #3

25. Use the formulas to complete the tableTP VC FC TC MC
AVC
AFC
ATC
100 1 10 2 16 3 21 4 26 5 30 6 36 7 46
2nd period

26. Calculating TC, VC, FC, ATC, AFC, and MCTP VC FC TC MC
AVC
AFC
ATC
100 1 10 2 16 3 21 4 26 5 30 6 36 7 46
6th period

27. Calculating TC, VC, FC, ATC, AFC, and MCTP VC FC TC MC
AVC
AFC
ATC
100 1 10
110 2 16
116 3 21
121 4 26
126 5 30
130 6 36
136 7 46
146

28. Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 3 21
100 - 1 10
110 2 16
116 3 21
121 4 26
126 5 30
130 6 36
136 7 46
146

29. Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 3
100 - 1 10
110 2 16
116 6 3 21
121 5 4 26
126 30
130 36
136 7 46
146

30. Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8
100 - 1 10
110 2 16
116 6 8 3 21
121 5 7 4 26
126
6.5 30
130 36
136 46
146
6.6

31. Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8
100 - 1 10
110 2 16
116 6 8 50 3 21
121 5 7
33.3 4 26
126
6.5 25 30
130 20 36
136
16.67 46
146
6.6
14.3
Asymptote

32. Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
40.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9

33. Per Unit Costs TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
40.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9

34. Calculate TC, VC, and FC of the 5th Unit
Curve D
Costs
Curve C
$20
$18
$16
$14
$12
$10 $8 $6 $4 $2
Curve B
Calculate TC, VC, and FC of the 5th Unit
1st period
TC= $70
VC= $60
TC = $10
Curve A
Quantity

35. 1 2 3 4 5 6 Costs TC=$14 x 5 TC=$70 MC ATC AVC AFC Quantity $20 $18
$16
$14
$12
$10 $8 $6 $4 $2
AVC
TC=$14 x 5
TC=$70
TC= $70
VC= $60
TC = $10
AFC
Quantity

36. 1 2 3 4 5 6 Costs VC=$12 x 5 VC=$60 MC ATC AVC AFC Quantity $20 $18
$16
$14
$12
$10 $8 $6 $4 $2
AVC
VC=$12 x 5
VC=$60
TC= $70
VC= $60
TC = $10
AFC
Quantity

37. 1 2 3 4 5 6 Costs FC=$5 x 2 FC=$10 MC ATC AVC AFC Quantity $20 $18 $16
$14
$12
$10 $8 $6 $4 $2
AVC
FC=$5 x 2
FC=$10
TC= $70
VC= $60
TC = $10
AFC
Quantity

38. How much does the 10th unit costs?MC
$30 25 20 15 10 5
ATC
AVC
Calculate TC, VC, and FC
Total Cost=$200
Variable Cost=$150
Fixed Cost=$50
Notice that VC + FC = TC
AFC
Quantity

39. How much does the 10th unit costs?MC
$30 25 20 15 10 5
ATC
AVC
Calculate TC, VC, and FC
Total Cost=$200
Variable Cost=$150
Fixed Cost=$50
Notice that VC + FC = TC
AFC
Quantity

40. How much does the 10th unit costs?MC
$30 25 20 15 10 5
ATC
AVC
Remember the vertical distance between ATC and AVC is AFC
Total Cost=$200
Variable Cost=$150
Fixed Cost=$50
Notice that VC + FC = TC
AFC
Quantity

41. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
0CDQ
0BEQ
0AFQ or BCDE

42. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
0CDQ
0BEQ
0AFQ or BCDE

43. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
0CDQ
0BEQ
0AFQ or BCDE

44. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
0CDQ
0BEQ
0AFQ or BCDE

45. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
0CDQ
0BEQ
0AFQ or BCDE

46. Objective 3.4 Shapes of Cost Curves

47. Why does marginal cost always go down then up?MC
Costs
Quantity

48. MP and MC are mirror images of each other
Relationship between Production and Cost
Output
As more workers are hired, their marginal product increases and then eventually decreases because of the law of diminishing marginal returns MP
The additional costs (MC) of the units they produce fall when MP goes up, but eventually increase as additional workers produce less and less output
MP and MC are mirror images of each other
Quantity of labor
Costs MC
Quantity of output

49. Why is the MC curve U-shaped?
The MC curve falls and then rises because of diminishing marginal returns.
Example:
Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10)
Workers
Total Prod
Marg Prod
Total Cost
Marginal Cost 1 5 2 13 3 19 4 23 25 6 26

50. Why is the MC curve U-shaped?
The MC curve falls and then rises because of diminishing marginal returns.
Example:
Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10)
Workers
Total Prod
Marg Prod
Total Cost
Marginal Cost - 1 5 2 13 8 3 19 6 4 23 25 26

51. Why is the MC curve U-shaped?
The MC curve falls and then rises because of diminishing marginal returns.
Example:
Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10)
Workers
Total Prod
Marg Prod
Total Cost
Marginal Cost -
$20 1 5
$30 2 13 8
$40 3 19 6
$50 4 23
$60 25
$70 26
$80

52. Why is the MC curve U-shaped?
The MC curve falls and then rises because of diminishing marginal returns.
Example:
Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10)
Workers
Total Prod
Marg Prod
Total Cost
Marginal Cost -
$20 1 5
$30
10/5 = $2 2 13 8
$40
10/8 = $1.25 3 19 6
$50
10/6 = $1.6 4 23
$60
10/4 = $2.5 25
$70
10/2 = $5 26
$80
10/1 = $10

53. Why is the MC curve U-shaped?
The additional cost of the first 13 units produced falls because workers have increasing marginal returns.
As production continues, each worker adds less and less to production so the marginal cost for each unit increases.
Workers
Total Prod
Marg Prod
Total Cost
Marginal Cost -
$20 1 5
$30
10/5 = $2 2 13 8
$40
10/8 = $1.25 3 19 6
$50
10/6 = $1.6 4 23
$60
10/4 = $2.5 25
$70
10/2 = $5 26
$80
10/1 = $10

54. MC
Costs
ATC
Quantity

55. Relationship between Production and Cost MC
Costs MC
Why does ATC go down then up?
When the marginal cost is below the average, it pulls the average down.
When the marginal cost is above the average, it pulls the average up.
ATC
Quantity
MC intersects the ATC curve at ATC’s lowest point
1st period
Example:
The average income in the room is $50,000.
An additional (marginal) person enters the room: Bill Gates.
If the marginal is greater than the average it pulls it up.
Notice that MC can increase but still pull down the average.

56. Thursday
Objective: 3.5 SWBAT describe the profit-maximizing output for any firm AY: Update your notebook daily. Graphs Chart and Notecard due 3/18 *Summative*
Do Now:
Identify the 3 Stages of Return in the table above.
In stage 1, why does marginal product increase?
In stage 2, why does marginal product decrease?
# of Workers
Total Product
Marginal Product  - 1 7 2 17 3 21 4 5 18 6 14

57. Agenda
Finish 3.4 notes
Problem Set #3 Parts I and II

58. Additional Practice

59. When in doubt, graph it outMC
Costs
ATC
$12
$10 $8 $2
AVC
AFC
100
Quantity

60. 2010 Question 18 B

61. 2008 Audit Question 23
23. C

62. 50. c

63. 1. A C 2.

64. 1. 2. E D

65. 7.D

66. Shifting Cost Curves

67. What if Fixed Costs increase to $200
Shifting Costs Curves TP VC FC TC MC
AVC
AFC
ATC
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
30.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9
What if Fixed Costs increase to $200

68. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
30.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9

69. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 200 100 - 1 10 110 2
200
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
30.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9

70. Which Per Unit Cost Curves Change?
Shifting Costs Curves TP VC FC TC MC
AVC
AFC
ATC
200 - 1 10
210
100
110 2 16
216 6 8 50 58 3 21
221 5 7
33.3
30.3 4 26
226
6.5 25
31.5 30
230 20 36
236
16.67
22.67 46
246
6.6
14.3
20.9
Which Per Unit Cost Curves Change?

71. ONLY AFC and ATC Increase!
Shifting Costs Curves TP VC FC TC MC
AVC
AFC
ATC
200 - 1 10
210
100
110 2 16
216 6 8 50 58 3 21
221 5 7
33.3
30.3 4 26
226
6.5 25
31.5 30
230 20 36
236
16.67
22.67 46
246
6.6
14.3
20.9
ONLY AFC and ATC Increase!

72. ONLY AFC and ATC Increase!
Shifting Costs Curves TP VC FC TC MC
AVC
AFC
ATC
200 - 1 10
210
110 2 16
216 6 8
100 58 3 21
221 5 7
66.6
30.3 4 26
226
6.5 50
31.5 30
230 40 36
236
33.3
22.67 46
246
6.6
28.6
20.9
ONLY AFC and ATC Increase!

73. If fixed costs change ONLY AFC and ATC Change!
Shifting Costs Curves
If fixed costs change ONLY AFC and ATC Change! TP VC FC TC MC
AVC
AFC
ATC
200 - 1 10
210 2 16
216 6 8
100
108 3 21
221 5 7
66.6
73.6 4 26
226
6.5 50
56.5 30
230 40 46 36
236
33.3
39.3
246
6.6
28.6
35.2
MC and AVC DON’T change!

74. Shift from an increase in a Fixed CostMC
ATC1
ATC
AVC
Costs (dollars)
AFC1
AFC
Quantity

75. Shift from an increase in a Fixed CostMC
ATC1
AVC
Costs (dollars)
AFC1
Quantity

76. What if the cost for variable resources increase
Shifting Costs Curves TP VC FC TC MC
AVC
AFC
ATC
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
30.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9
What if the cost for variable resources increase

77. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
30.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9

78. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 110 10 2
100 - 1 11
110 10 2 18
116 6 8 50 58 3 24
121 5 7
33.3
30.3 4 30
126
6.5 25
31.5 35
130 20 26 43
136
16.67
22.67 55
146
6.6
14.3
20.9

79. Which Per Unit Cost Curves Change?
Shifting Costs Curves TP VC FC TC MC
AVC
AFC
ATC
100 - 1 11
111 10
110 2 18
118 6 8 50 58 3 24
124 5 7
33.3
30.3 4 30
130
6.5 25
31.5 35
135 20 26 43
143
16.67
22.67 55
155
6.6
14.3
20.9
Which Per Unit Cost Curves Change?

80. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 111 10 110
100 - 1 11
111 10
110 2 18
118 7 8 50 58 3 24
124 6
33.3
30.3 4 30
130
6.5 25
31.5 5 35
135 20 26 43
143
16.67
22.67 55
155 12
6.6
14.3
20.9
MC, AVC, and ATC Change!

81. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 11 111 110 2
100 - 1 11
111
110 2 18
118 7 9 50 58 3 24
124 6 8
33.3
30.3 4 30
130
7.5 25
31.5 5 35
135 20 26 43
143
7.16
16.67
22.67 55
155 12
7.8
14.3
20.9
MC, AVC, and ATC Change!

82. If variable costs change MC, AVC, and ATC Change!
Shifting Costs Curves
If variable costs change MC, AVC, and ATC Change! TP VC FC TC MC
AVC
AFC
ATC
100 - 1 11
111 2 18
118 7 9 50 59 3 24
124 6 8
33.3
41.3 4 30
130
7.5 25
32.5 5 35
135 20 27 43
143
7.16
16.67
23.83 55
155 12
7.8
14.3
22.1

83. Shift from an increase in a Variable Costs
MC1 MC
ATC1
AVC1
ATC
AVC
Costs (dollars)
AFC
Quantity

84. Shift from an increase in a Variable Costs
MC1
ATC1
AVC1
Costs (dollars)
AFC
Quantity

85. Friday Objective: 3.5 SWBAT describe the profit-maximizing output for any firm AY: Update your notebook daily. Problem Set #3 Parts III and IV due Monday. Graphs Chart and Notecard due 3/18 *Summative*

86. Agenda
Do Now
3.5 Profit maximizing
Weekly Assessment

87. Unit 3: Costs of Production and Perfect Competition Objective 3
Unit 3: Costs of Production and Perfect Competition Objective 3.5 Maximizing Profit
1st period/go over Problem Set #3

88. Production = Converting inputs into output

89. Maximizing PROFIT! 89

90. Short-Run Profit Maximization
What is the goal of every business?
To Maximize Profit!!!!!!
To maximize profit firms must make the right output
Firms should continue to produce until the additional revenue from each new output equals the additional cost.
Example (Assume the price is $10)
Should you produce…
…if the additional cost of another unit is $5
…if the additional cost of another unit is $9
…if the additional cost of another unit is $11 90

91. Profit Maximizing Rule Short-Run Profit Maximization
MR=MC
Short-Run Profit Maximization
What is the goal of every business?
To Maximize Profit!!!!!!
To maximum profit firms must make the right output
Firms should continue to produce until the additional revenue from each new output equals the additional cost.
Example (Assume the price is $10)
Should you produce…
…if the additional cost of another unit is $5
…if the additional cost of another unit is $9
…if the additional cost of another unit is $11 91

92. Bevo’s PJs 1. Fill in the table 2. Answer questions #1 through 6
3. Graph MR and MC
Corrections:
Output 5- VC is 60
AVC is 12
ATC is 16
4. Answer the two questions on page two of the notes.

93. Maximizing Profit
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12 2
$22 3
$27 4
$40 5
$60 6
$100 TR MR
Profit -
$30
-$2
$60
$18
$90
$43
$120
$150
$70
$180
5 Units
$150 Total Revenue ($30 x 5)
$70 Profit ($150 - $80)
Notice that at 6 units the firm is still making profit. It’s just not maximizing profit

94. Maximizing Profit
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12 2
$22 3
$27 4
$40 5
$60 6
$100 TR MR
Profit -
$30
-$2
$60
$18
$90
$43
$120
$150
$70
$180
5 Units
$150 Total Revenue ($30 x 5)
$70 Profit ($150 - $80)
Notice that at 6 units the firm is still making profit. It’s just not maximizing profit

95. Assume every unit can be sold for $10. Which unit maximizes profit
Assume every unit can be sold for $10. Which unit maximizes profit? 4 units because MR=MC
Use marginal analysis to explain why you should never produce 5 units. At 5 units the MC is greater than the MR.
Marginal Cost
Price
$12
$10 $8 $6
Marginal
Revenue
Quantity

96. Definition of the “Short-Run”
We will look at both short-run and long-run production costs.
Short-run is NOT a set specific amount of time.
The short-run is a period in which at least one resource is fixed.
Plant capacity/size is NOT changeable
In the long-run ALL resources are variable
NO fixed resources
Plant capacity/size is changeable
Today we will examine LONG-run costs. 96

97. Definition and Purpose of the Long Run
In the long run ALL resources are variable. Plant capacity/size can change.
Why is this important?
The Long-Run is used for planning. Firms use to identify which plant size results in the lowest per unit cost.
IDEA New York??

98. There are only three possible outcomes:
Ex: Assume a firm is producing 100 hotdogs with a fixed number of resources (workers, machines, etc.).
If this firm decides to DOUBLE the number of resources, what will happen to the number of hotdogs it can produce?
There are only three possible outcomes:
Hotdogs will more than double
(increasing returns to scale)
Hotdogs will double
(constant returns to scale)
Hotdogs will less than double
(decreasing returns to scale)

99. Between the two firms, who has the lowest per-unit cost?
How It’s Made
Between the two firms, who has the lowest per-unit cost?
Watch this video:
This video highlights how large firms use mass production techniques (Townsend 2400 machine) and specialization in order to increase their output and decrease their per unit costs.

101. Long Run ATC
What happens to the average total costs of a product when a firm increases its plant capacity?
Example of various plant sizes:
I make chairs out of my garage with one saw
I rent out building, buy 5 saws, hire 3 workers
I rent a factory, buy 20 saws and hire 40 workers
I build my own plant and use robots to build chairs.
I create plants in every major city in the U.S.
Long Run ATC curve is made up of all the different short run ATC curves of various plant sizes.
101

102. Long Run AVERAGE Total Cost
Costs
MC1
ATC1
$9,900,000
$50,000
$6,000
$3,000
, , ,000,0000
Quantity Cars
102

103. Long Run AVERAGE Total Cost
Economies of Scale- Long Run Average Cost falls because mass production techniques are used.
Costs
MC1
ATC1
MC2
$9,900,000
ATC2
$50,000
$6,000
$3,000
, , ,000,0000
Quantity Cars
103

104. Long Run AVERAGE Total Cost
Economies of Scale- Long Run Average Cost falls because mass production techniques are used.
Costs
MC1
ATC1
MC2
$9,900,000
MC3
ATC2
$50,000
ATC3
$6,000
$3,000
, , ,000,0000
Quantity Cars
104

105. ECONOMIES OF SCALE Why does economies of scale occur?
Firms that produce more can better use Mass Production Techniques and Specialization.
Example:
A car company that makes 50 cars will have a very high average cost per car.
A car company that can produce 100,000 cars will have a low average cost per car.
Using mass production techniques, like robots, will cause total cost to be higher but the average cost for each car would be significantly lower.
105

106. Economies of Scale is the idea that: Getting bigger is cheaper!

107. Long Run AVERAGE Total Cost
Constant Returns to Scale- The long-run average total cost is as low as it can get.
Costs
MC1
ATC1
MC2
$9,900,000
MC3
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars
107

108. Long Run AVERAGE Total Cost Diseconomies of Scale-
Long run average costs increase as the firm gets too big and difficult to manage.
Costs
MC1
ATC1
MC2
$9,900,000
MC5
MC3
ATC5
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars
108

109. Long Run AVERAGE Total Cost
These are all short run average costs curves. Where is the Long Run Average Cost Curve?
Costs
MC1
ATC1
MC2
$9,900,000
MC5
MC3
ATC5
MC4
ATC2
$50,000
ATC3
ATC4
$6,000
$3,000
, , ,000,0000
Quantity Cars
109

110. Long Run AVERAGE Total Cost
Costs
Economies of Scale
Constant Returns to Scale
Diseconomies of Scale
Long Run Average Cost Curve
, , ,000,0000
Quantity Cars
110

111. Constant Returns to Scale Long Run Average Cost Curve
LRATC Simplified
The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES.
Costs
Economies of Scale
Constant Returns to Scale
Diseconomies of Scale
Long Run Average Cost Curve
Quantity
111

112. Think About It!
What is the difference between the short-run and the long-run?
Why does a firm use mass production techniques in order to increase its output?

113. Think About It!
What is the difference between the short-run and the long-run?
The short-run is defined as period in which a firm has at least on fixed resource. The long-run is defined a period in which all resources are variable and helps firms plan for future growth.
Why does a firm use mass production techniques in order to increase its output?
A firm uses mass production techniques in order to decrease their products’ per-unit cost. A lower per-unit cost implies a lower price to attract consumers.

114. 2010 Question 19

115. Long Run Production Practice
Multiple Choice questions