Technology, Production, and Costs 11.1Technology: An Economic Definition 11.2The Short Run and the...
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Technology, Production, and Costs 11.1 Technology: An Economic Definition 11.2 The Short Run and the Long Run in Economics 11.3 The Marginal Product of Labor and the Average Product of Labor 11.4 The Relationship between Short-Run Production and Short-Run Cost 11.5 Graphing Cost Curves 11.6 Costs in the Long Run
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Transcript of Technology, Production, and Costs 11.1Technology: An Economic Definition 11.2The Short Run and the...
Technology, Production, and Costs
11.1 Technology: An Economic Definition
11.2 The Short Run and the Long Run in Economics
11.3 The Marginal Product of Labor and the Average Product of Labor
11.4 The Relationship between Short-Run Production and Short-Run Cost
11.5 Graphing Cost Curves
11.6 Costs in the Long Run
Total Fixed Costs
Do change with output
Do not change with output
Total Variable CostsTotal Costs = TFC + TVC
The factory size can change
Long Run
Factors like labor and raw materials can be changed
Short Run:
laborraw materials
rent
bourbon scotch beer
explicit
implicit
total
economic
normal
accounting
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
Jill Johnson’s Costs per Year
The entries in red are explicit costs, and the entries in blue are implicit costs.
Average Fixed Costs
Do change with outputDo not change with output
Average Variable CostsAverage Total Costs = ?+?Marginal CostChange in cost with 1 more
output
She produces these in her own home without any help, unless she has a large number of orders on a
particular day.
Marcia Deal bakes and decorates large, elaborate,
multi-layered, special occasion cakes.
# TC TFC TVC ATC MC
0
1
2
3
4
5
6
7
8
With the following information, complete the table:
The total cost of producing 5 cakes is $135Marcia’s total fixed cost for 1 cake is $25
The total cost of 2 cakes is $60
The total variable cost for 1 cake is $25
The total variable cost of producing 7 cakes is $220The marginal cost of the 6th cake is $45
The marginal cost for the 8th cake is $91The ATC per cake when 3 cakes or when 4 cakes are made is $25
Why is the Marginal Cost of the 7th and 8th cakes fairly high?
If Marcia can sell from 0 - 8 cakes at $40 each, how many will she choose to
produce and sell per day if she is trying to maximize her profits??
On the graph, plot the average total cost and marginal cost of producing
from 0 – 8 cakes.Plot the marginal cost at the
midpoints
$120
110
100
90
80
70
60
50
40
30
20
10
01 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
Graph Marcia’s ATC, MC and MR
$120
110
100
90
80
70
60
50
40
30
20
10
01 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
Graph Marcia’s ATC, MC and MR
Number of Cakes
Total Revenue
Total CostTotal Profit
Marginal Revenue
Marginal Cost
0
1
2
3
4
5
6
7
8
$350
300
250
200
150
100
50
01 2 3 4 5 6 7 8 Number of
Cakes
Tota
l C
ost
Graph Marcia’s TC, TFC and TVC
$350
300
250
200
150
100
50
01 2 3 4 5 6 7 8 Number of
Cakes
Tota
l C
ost
Graph Marcia’s TC, TFC and TVC
Output TFC TVC TC0 100 0 1 50
2 90
3 120
4 160
5 220
6 300
7 400
8 5209 670
10 900
______
___
___
___
___
____________
100
100
100
100
100
100
100
100
100
100
100
150
190
220
260
320
400
500
620
770
1000
______
___
___
___
___
____________
Output AFC AVC ATCMC0 (TFC/output) (TVC/output) (TC/output) (TC1-TC0)
1 ________ ________ ________ _____
2 ____________ ____________ ____________ _______
3 ____________ ____________ ____________ _______
4 ____________ ____________ ____________ _______
5 ____________ ____________ ____________ _______
6 ____________ ____________ ____________ _______
7 ____________ ____________ ____________ _______
8 ____________ ____________ ____________ _______
9 ____________ ____________ ____________ _______
10 ____________ ____________ ____________ _______
1
2
3
4
5
6
7
8
9
10
100
50
33
25
20
17
14
12
11
10
50
45
40
40
44
50
59
65
74
90
150
95
73
65
64
67
73
78
85
100
50
40
30
40
60
80
100
120
150
230
Cost
Output
600
500
400
300
200
100
1 2 3 4 5 60 7 8 9 10
Total Variable Cost
Total Fixed Cost
Total Cost
700
800
900
Cost
Output
60
50
40
30
20
10
1 2 3 4 5 60
Graphed
7 8 9 10
70
80
90
and
LRAC
Cars Produced (100,000)
60,000
50,000
40,000
30,000
20,000
10,000
1 2 3 4 5 60 7 8 9 10
Constant Returns to
Scale
Diseconomies of Scale
Economies of Scale
Gets less efficient as size
increases
Gets more efficient as size increases
Efficient Range of Production
Economies of Scale
Less efficient as size increases
More efficient as size increasesDiseconomies of Scale
Constant Returns to ScaleEfficient Range of Production
Don’t Confuse Diminishing Returns with Diseconomies of Scale
Diminishing returns applies only to the short run, when at least one of the firm’s inputs, such as the quantity of machinery it uses, is fixed.
Diseconomies of scale apply only in the long run, when the firm is free to vary all its inputs, can adopt new technology, and can vary the amount of machinery
it uses and the size of its facility.
The least cost combination of inputs.
Efficient Production
The recipe: going from inputs to outputs
It varies by firm
Like Labor
In the beginning, output increases with each unit added, but at some point output will begin to decrease
with each additional unit of a resource.
ATC curve goes down as efficiency increases
Then begins to go up
The Law of Diminishing Returns
Labor Total Marginal AverageData: Output
0 01 32 83 124 155 176 18
___
______
___
______
35432
1
______
___
______
3443.75
3.4___3
Output
Quantity of Labor
18
15
12
9
6
3
1 2 3 4 5 60
Total Output
Output
Quantity of Labor
6
5
4
3
2
1
1 2 3 4 5 60
Average and Marginal
A Summary of Definitions of Cost
1. Which of the following is most likely to be an implicit cost of production?
a. property taxes on a building owned by the firmb. transportation costs paid to a trucking supplierc. rental payments for a building utilized by the company and rented
from another partyd. interest income foregone on funds invested in the firm by the
owners
2. The law of diminishing returnsa. explains why marginal cost eventually increases as output expands.b. implies that average fixed cost will remain unchanged as output expands.c. is true for physical production activities but not for activities such as studying.d. applies to a capitalist economy but would be irrelevant if the means of production were owned by the state.
3. Which of the following represents a long-run adjustment?a. the hiring of four additional cashiers by a supermarketb. a cutback on purchases of coke and iron ore by a steel manufacturerc. construction of a new assembly-line plant by a car manufacturerd. the extra dose of fertilizer used by a farmer on his wheat crop
4. The short-run average total cost (ATC) curve of a firm is U-shaped becausea. larger firms always have lower per-unit costs than smaller firms.b. at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns.c. diminishing returns will be present when output is small, and high AFC will push per-unit cost to high levels when output is large.d. diseconomies of scale will be present at both small and large output rates.
5. When costs that vary with the level of output are divided by the output, you have calculated
a. total changing cost. b. total fixed cost.c. average fixed cost. d. average variable cost.6. A downward-sloping portion of a LR average total cost curve is the result of
a. economies of scale. b. diseconomies of scale.c. diminishing returns. d. the existence of fixed resources.
7. In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be a. $25. b. $2,500. c. $5,000. d.$7,500.
At what output in the graph would the firm’s per-unit cost of production be minimized?a.3 b. 4 c. 5 d. 6What is the firm’s approximate total cost when it produces three units?a.10 b. 16 c. 48 d. 60
What is the firm’s total cost when it produces four units?a.11 b. 15 c. 60 d. 75 The average variable cost and average
total cost for a firm are indicated in the graph. If the marginal cost curve were constructed, at what output would it cross the AVC curve?a. 10 b. 15 c. 20 d.
25At what output should a the marginal cost curve cross the ATC curve?a. 15 b. 20 c. 25 d.
30
b. 4
c. 48
c. 60
b. 15
b. 20
