Examples of a town of Lots of pizza shop but have one cable TV company What are the Costs? Buying material to make a product, including the machinery, place and cost of selling material Total Revenue, Total Cost and Profit: Total Revenue: Amount received after the exchange for the sale of firms product Total Cost: Market value of the effort a firm puts in production Profit: TR TC Opportunity Costs Cost given up in order to gain something and forgone Firms cost of production includes all opportunity costs of making its output of goods and services Explicit Costs: Input costs that require an outlay of money by the firm Implicit Costs: Input costs that dont require an outlay of money by firm The Cost of Capital as an Opportunity Cost The Implicit cost of business is the opportunity cost of Financial Capital invested in business o Example Using personal saving to buy a factory But the money from personal saving earns interest left in the bank The forgone interest = implicit opportunity cost of Financial capital Economic Profit VS Accounting Profit Economist Measure: Firms Total Revenue All the Opportunity Cost of producing good and services sold Accounting Profit: Firms Total Revenue Only Explicit Costs
Production and Costs
Production Functions o The relationship between the quantity of input used to make the goods and quantity of output of goods
Marginal Product: increase in output that arise from additional
unit of input Diminishing Marginal Product: property where the marginal product of an input declines as the quantity of the input increases
The Various Measure of Cost from Firms Total Cost
Fixed Cost: Cost that do not vary with quantity of output produced Variable Cost: Cost that do vary with the Quantity of output produced
Total Cost = Fixed cost +Variable Cost
Average and Marginal costs
Average Total Costs (ATC) = Total Cost / Quantity of Output Average Fixed Costs (AFC) = Fixed Costs / Quantity of Output Average Variable Costs (AVC) = Variable Costs/ Quantity of Output Marginal Cost (MC) = Increase in total cost came when extra unit was produced o ATC = TC/ Q o MC= Difference TC/ Difference Quantity Cost Curves and Their Shapes Rising Marginal Cost o Marginal Cost rise with quantity of output produced resulting in diminishing marginal product U Shaped Average Total Cost o Average total cost is the sum of fixed costs and average variable cost o Average Fixed cost always declines as output rise Fixed cost is expanded over large number of units o Average Variable Cost always rises Output increases because of diminishing marginal product Efficient Scale: Quantity of output which minimize average total cost Relationship between Marginal Cost and Average total cost When Marginal cost is less than average total cost = fall of Average total cost
When Marginal cost if high than average total cost= Rise in
Average total cost
Typical Cost Curves
Have three properties which are very important 1. Marginal cost eventually rise with quantity of output 2. Average total cost curve is U shaped 3. Marginal cost curve crosses average total cost and minimum of average total cost Costs in the SHORT RUN and In the LONG RUN and their relationship
Division of total cost between fixed and variable depends on the
time horizon Fixed cost decisions are short run and variable cost are long run
Economies and Diseconomies of Scale
Economies of scale o Long run average total cost falls as the quantity output rises Diseconomies of Scale o Long run average total cost rise as the quantity output rises Constant Return to Scale o Long run average total cost stays same as the quantity of output changes