Chapter 10 Technology, Production, and...
Transcript of Chapter 10 Technology, Production, and...
Tech. Production, and Costs
Our familiar role in an economy
◦ Consumers
◦ Demand curves come from consumers
preferences
Today
◦ Producers, also known as firms
◦ Supply curves come mainly from costs of
production
◦ Firms make decisions like What to make? What inputs are required? What technique of
production will be used? How to structure compensation?
Technology – The process a firm uses to
turn inputs into outputs
◦ Lawn Mowing Example
Technological Change – change in in how
a firm uses its inputs
◦ Lawn Mowing – one person per lawn to
several people per lawn
Technology
Production
Classify into two general time periods
◦ Short run
A time period when at least one input is _______
Variable input = number of workers
Fixed input = size of the building
◦ Long run
A time period in which all inputs can change or be
varied
Number of workers can be changed ________
Size of building can be changed ________
_________is variable in long run!
Costs
Total Cost = Fixed Costs + Variable Costs
TC = FC + VC
Total Cost
◦ The cost of all the inputs used in production
Variable costs
◦ Costs that change as output changes
Labor, Raw Materials, Electricity, Utilities
More firm produces, the more costs incurred
Fixed Costs
◦ Costs that remain the same as output changes
_______ does not change if you sell 1 pizza or 700 pizzas
REMEMBER Economists always include opportunity costs!
Opportunity Cost: The highest valued alternative that must be given up to engage
in an activity
◦ Explicit Cost – A cost that involves spending money
◦ Implicit Cost – A nonmonetary opportunity cost
Costs
Economic
Profit
Implicit
Costs
Explicit
Costs
Accounting
Profit
Explicit
Costs
Revenue Revenue
Total
Economic
Costs
How an Economist
Views a Firm
How an Accountant
Views a Firm
Costs In the example below, what are the Explicit Costs and what
are the Implicit Costs?
Pizza Shop Example
Pizza dough, tomato sauce, and other ingredients $20,000
Wages $48,000
Interest payments on loan to buy pizza ovens $10,000
Electricity $6,000
Lease payment for store $24,000
Foregone salary $30,000
Foregone interest $3,000
Economic depreciation 10,000
Total $151,000
Returns from hiring a worker
A firm has to pay a cost to hire a worker
◦ What does the firm receive in return?
◦ __________________________
200
450
550
600
625 640 Total Output
DQ4 from hiring fourth worker
DQ3 from hiring third worker
DQ2 from hiring second worker
DQ1 from hiring first worker
increasing marginal returns
diminishing marginal returns
Units of Output
Number of Workers 6 2 3 4 5 1
VARIABLE INPUT
Marginal Returns
Increasing Marginal Returns
◦ What you get back for each additional unit of input gets bigger
◦ Think of additional workers specializing
Decreasing Marginal Returns
◦ What you get back for each additional unit of input gets smaller.
◦ Think of congestion of the pizza kitchen
Why do decreasing marginal returns happen?
ANS: _______________________
◦ ___________________________________
Marginal Product •Def: The Amount
added to total
output with each
additional worker
is called the
marginal Product
•How much did
the first worker
produce?
•____________
•How much
additional was
produced with 2
workers instead of
one?
•_____________
•Key Point:
•Marginal Product of Labor is
Upward sloping in the IMR region
• MPL is downward sloping in the
DMR region.
increasing marginal returns
diminishing marginal returns
Exam
Score in
History
Hours of Study 6 2 3 4 5 1
Example: History Exam Score
•Where is the region of
increasing marginal returns?
•__________________
•Where is the region of
diminish marginal returns?
•___________________.
•How do you see it?
•_______________________
________________________
_____________________
•_______________________
________________________
___________ 15
35
75
80
Costs
Next Step: Translate information about
inputs and outputs into information about
outputs and cost
Total Output
Units of Output
Number of Workers 6 2 3 4 5 1
650 1300
1950
2600
3250
3900
Units of Output
Total
Variable
Costs
Increasing
MR mean
Costs
increase
________
Decreasing MR mean Costs
increase _________
Each Unit
of Labor
costs
$650 per
week
200
450
550
600
625 640
200 450 550 600 625
640
IMR – Spreading Costs
of labor over more units
of output
650 1300
1950
2600
3250
3900
Units of Output
Variable
Costs Each Unit
of Labor
costs
$650 per
week
200 450 550 600 625
640
Total Cost Curve
•What happens to this graph when we include labor costs AND
fixed costs?
•The curve shifts _____ by the amount of the ______costs
•______ costs do not vary with out put, so the curve shifts
___________ by the same amount at every output.
Fixed Costs
Including Fixed Costs
Average vs. Marginal
Average always follows marginal
◦ Height Example
◦ GPA Example
If marginal is greater than average, then
the marginal unit pulls the average up.
If marginal is less than the average, then
the marginal unit drags the average down
650 1300
1950
2600
3250
3900
Units of Output
Costs
Each Unit
of Labor
costs
$650 per
week
200 450 550 600 625
640
•Marginal Cost – Additional Cost from producing on more unit of a good
•In the region of increasing marginal returns, marginal costs are falling
•This is because the firm is spreading additional cost over more
units
•In the region of decreasing marginal returns, marginal cost is rising
•This is because the firm is spreading additional cost over fewer
units
200 450 550 600 625
640
2
4
6
8
10
12
14
16
MC
ATC Costs
Total Cost Curve
Graphing Short Run Cost Curves THINGS TO NOTE
•Marginal cost curve
passes through the
minimum of ATC and AVC
•When MC is ______ATC
and AVC, MC is dragging
them _________.
•When MC is ______
ATC and AVC, MC is
pulling them _______
•Average Fixed Costs get
smaller with output.
•The distance between
ATC and AVC is AFC.
•Because AFC is getting
_________, the distance
between ATC and AVC
gets _______ too
Costs in the Long Run
What is different about the Long Run?
◦ Nothing is fixed
In long run:
◦ Total Cost and Average Cost curves have the same shape as in
the short run, but for different reasons
◦ In short run, the shapes were caused by increasing and
decreasing marginal returns.
◦ In the long run they are caused by Economies and Diseconomies
of Scale
◦ Economies of Scale – When a firm’s average costs fall as output
increases
Caused by:
Utilization of mass production
Purchasing inputs at lower cost because of their size
Costs in the Long Run
•Up to ___________, average costs
are decreasing Economies of
Scale
•Constant Returns to scale – LR
Average costs stay the same with
increasing output ___________
_________
•Diseconomies of scale: LR average
costs are increasing
•Caused by inability to manage
well such a large firm.
•Thought Experiment in the Long
Run:
•Choose the “plant size” to
minimize average costs