1. 13 The Costs of Production P R I N C I P L E S O F F O U R T H E D I T I O N
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11. EXAMPLE 1: Farmer Jack’s Production Function CHAPTER 13 THE COSTS OF PRODUCTION 0 0 500 1,000 1,500 2,000 2,500 3,000 0 1 2 3 4 5 No. of workers Quantity of output 3000 5 2800 4 2400 3 1800 2 1000 1 0 0 Q (bushels of wheat) L (no. of workers)
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13. EXAMPLE 1: Total & Marginal Product CHAPTER 13 THE COSTS OF PRODUCTION 200 400 600 800 1000 MPL 0 3000 5 2800 4 2400 3 1800 2 1000 1 0 0 Q (bushels of wheat) L (no. of workers) ∆ Q = 1000 ∆ L = 1 ∆ Q = 800 ∆ L = 1 ∆ Q = 600 ∆ L = 1 ∆ Q = 400 ∆ L = 1 ∆ Q = 200 ∆ L = 1
14. EXAMPLE 1: MPL = Slope of Prod Function CHAPTER 13 THE COSTS OF PRODUCTION MPL equals the slope of the production function. Notice that MPL diminishes as L increases. This explains why the production function gets flatter as L increases. 3000 5 200 2800 4 400 2400 3 600 1800 2 800 1000 1 1000 0 0 MPL Q (bushels of wheat) L (no. of workers) 0 0 500 1,000 1,500 2,000 2,500 3,000 0 1 2 3 4 5 No. of workers Quantity of output
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18. EXAMPLE 1: Farmer Jack’s Costs CHAPTER 13 THE COSTS OF PRODUCTION Total Cost 3000 5 2800 4 2400 3 1800 2 1000 1 0 0 cost of labor cost of land Q (bushels of wheat) L (no. of workers) 0 $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
19. EXAMPLE 1: Farmer Jack’s Total Cost Curve CHAPTER 13 THE COSTS OF PRODUCTION Q (bushels of wheat) Total Cost 0 $1,000 1000 $3,000 1800 $5,000 2400 $7,000 2800 $9,000 3000 $11,000
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21. EXAMPLE 1: Total and Marginal Cost CHAPTER 13 THE COSTS OF PRODUCTION $10.00 $5.00 $3.33 $2.50 $2.00 Marginal Cost ( MC ) $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 Total Cost 3000 2800 2400 1800 1000 0 Q (bushels of wheat) ∆ Q = 1000 ∆ TC = $2000 ∆ Q = 800 ∆ TC = $2000 ∆ Q = 600 ∆ TC = $2000 ∆ Q = 400 ∆ TC = $2000 ∆ Q = 200 ∆ TC = $2000
22. EXAMPLE 1: The Marginal Cost Curve CHAPTER 13 THE COSTS OF PRODUCTION MC usually rises as Q rises, as in this example. $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 TC MC 3000 2800 2400 1800 1000 0 Q (bushels of wheat) $10.00 $5.00 $3.33 $2.50 $2.00
27. EXAMPLE 2: Marginal Cost CHAPTER 13 THE COSTS OF PRODUCTION Recall, Marginal Cost ( MC ) is the change in total cost from producing one more unit: Usually, MC rises as Q rises, due to diminishing marginal product. Sometimes (as here), MC falls before rising. (In other examples, MC may be constant.) 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 MC TC Q 140 100 70 50 40 50 $70 ∆ TC ∆ Q MC =
28. EXAMPLE 2: Average Fixed Cost CHAPTER 13 THE COSTS OF PRODUCTION 100 7 100 6 100 5 100 4 100 3 100 2 100 1 $100 0 AFC FC Q Average fixed cost ( AFC ) is fixed cost divided by the quantity of output: AFC = FC / Q Notice that AFC falls as Q rises: The firm is spreading its fixed costs over a larger and larger number of units. 0 14.29 16.67 20 25 33.33 50 $100 n.a.
29. EXAMPLE 2: Average Variable Cost CHAPTER 13 THE COSTS OF PRODUCTION 520 7 380 6 280 5 210 4 160 3 120 2 70 1 $0 0 AVC VC Q Average variable cost ( AVC ) is variable cost divided by the quantity of output: AVC = VC / Q As Q rises, AVC may fall initially. In most cases, AVC will eventually rise as output rises. 0 74.29 63.33 56.00 52.50 53.33 60 $70 n.a.
30. EXAMPLE 2: Average Total Cost CHAPTER 13 THE COSTS OF PRODUCTION ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 TC Q 0 Average total cost ( ATC ) equals total cost divided by the quantity of output: ATC = TC / Q Also, ATC = AFC + AVC 88.57 80 76 77.50 86.67 110 $170 n.a. 74.29 14.29 63.33 16.67 56.00 20 52.50 25 53.33 33.33 60 50 $70 $100 n.a. n.a. AVC AFC
31. EXAMPLE 2: Average Total Cost CHAPTER 13 THE COSTS OF PRODUCTION Usually, as in this example, the ATC curve is U-shaped. 88.57 80 76 77.50 86.67 110 $170 n.a. ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 TC Q 0 $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
32. EXAMPLE 2: The Various Cost Curves Together CHAPTER 13 THE COSTS OF PRODUCTION 0 AFC AVC ATC MC $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
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35. EXAMPLE 2: Why ATC Is Usually U-shaped CHAPTER 13 THE COSTS OF PRODUCTION 0 As Q rises: Initially, falling AFC pulls ATC down. Eventually, rising AVC pulls ATC up. $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
36. EXAMPLE 2: ATC and MC CHAPTER 13 THE COSTS OF PRODUCTION 0 When MC < ATC , ATC is falling. When MC > ATC , ATC is rising. The MC curve crosses the ATC curve at the ATC curve’s minimum. ATC MC $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs
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38. EXAMPLE 3: LRATC with 3 Factory Sizes CHAPTER 13 THE COSTS OF PRODUCTION Firm can choose from 3 factory sizes: S , M , L . Each size has its own SRATC curve. The firm can change to a different factory size in the long run, but not in the short run. ATC S ATC M ATC L Q Avg Total Cost
39. EXAMPLE 3: LRATC with 3 Factory Sizes CHAPTER 13 THE COSTS OF PRODUCTION LRATC To produce less than Q A , firm will choose size S in the long run. To produce between Q A and Q B , firm will choose size M in the long run. To produce more than Q B , firm will choose size L in the long run. ATC S ATC M ATC L Q Avg Total Cost Q A Q B
40. A Typical LRATC Curve CHAPTER 13 THE COSTS OF PRODUCTION In the real world, factories come in many sizes, each with its own SRATC curve. So a typical LRATC curve looks like this: Q ATC LRATC
41. How ATC Changes as the Scale of Production Changes CHAPTER 13 THE COSTS OF PRODUCTION Economies of scale : ATC falls as Q increases. Constant returns to scale : ATC stays the same as Q increases. Diseconomies of scale : ATC rises as Q increases. LRATC Q ATC
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48. The Complete Data for Example 2 CHAPTER 13 THE COSTS OF PRODUCTION 102.50 90 12.50 820 720 100 8 88.57 74.29 14.29 620 520 100 7 80 63.33 16.67 480 380 100 6 76 56.00 20 380 280 100 5 77.50 52.50 25 310 210 100 4 86.67 53.33 33.33 260 160 100 3 110 60 50 220 120 100 2 $170 $70 $100 170 70 100 1 n.a. n.a. n.a. $100 $0 $100 0 MC ATC AVC AFC TC VC FC Q 200 140 100 70 50 40 50 $70
Notas do Editor
This chapter is very technical and full of definitions and graphs. Most of the material is not very analytical. But it may be harder for some students to see the relevance of this material. So, this PowerPoint begins with a short brainstorming activity on the next slide. This activity asks students to think of several costs that a real-world firm actually faces, and the kinds of decisions that are affected by these costs. Having realized that costs are important to business decisions, students should be more motivated to learn the concepts in this chapter. It might also be worthwhile to point out that material in this chapter provides the foundation for the following four chapters. In those four chapters, we will see how firms in different market structures use the cost concepts introduced here to make decisions about how much stuff to produce, what price to charge, and so forth. Learning that material will be much easier for students if they have a good grasp of the material in this chapter.
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