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Ms Cummins

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Miss Cummins

on 8 February 2017

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Transcript of Ms Cummins

What is a Company's Shut Down Point in the Short Run?
The Law of Diminishing Marginal Returns
As more and more of variable factor is added to a fixed factor, at some stage the increase in output caused by the last unit of the variable factor will begin to decline
Average Costs
ATC - Average Total Cost
AC - Average Cost
Costs of a business
Fixed and Variable Costs
SIDE A
SIDE B
Question
If a company wishes to increase the number of employees from 15 to 16 it has to increase the weekly wage from €200 to €210. What's the marginal cost of labour?
Chapter 7 - Cost of Production
THANK YOU!
Ms Cummins
Land
Labour
Capital
Enterprise
Firm
Output
Time Periods
* Very important !
Short run
Period of time during which at least one factor of production is fixed in supply
Long run
Period of time during which all of the factors of production are variable in quantity
Example
In the LR, both the capital and the labour are variable
So in the SR the capital is fixed and the labour can be variable
Planning permission, contractors,finance
It is always busy but will not be able to expand the business immediately in response to and increasing demand
Pat's Deli is very popular. It used capital and labour
Explicit costs
These are costs incurred by the firm when it pays an amount of money for something
Implicit costs
These are costs that do not include the payment of money
Investing money in a business and not charging interest versus putting money in the bank
When a business is set up, the owner may take a lower wage than employees
Opportunity cost - cost of forgone alternatives
Costs
Quantity
Fixed costs = don't change as output changes
Example = rent and insurance
FC
Costs
Quantity
Variable costs = vary as output changes
Examples = raw materials and wages
VC
Total cost is both fixed and variable costs
This gives us total cost of production
Costs
Quantity
FC
VC
Total Cost
FC + VC = TC
In the short term a company may make a loss, does this mean it should shut down??
Both companies are making a loss - this could not be sustained in the long run

Pat should stay in business and Chris should close the business down.

Why?
Chris doesn't cover the variable costs
Pat does!
Since both deli's have the same fixed cost and assuming that they are in a timed lease agreement,
they will both incur a loss of €500 if no production takes place
Chris's loss is €600 if the company produces and if no production takes place - the loss would be €500, as fixed costs of €500 would still be incurred
Pat's loss is €250 if the company produces, which is preferable to a loss of €500
In the short run, the company objective is to cover their variable costs and contribute to the reduction of their fixed costs
Back to the Deli mentioned earlier . . .
Imagine Pat is the sole employee at the deli
Pat is responsible for EVERYTHING
However, at some stage the extra (marginal) output per worker will decline as more are employed
15 workers in a small deli would not be a good idea !!
Then he hires a second and third worker
Eventually there is someone for each task
He then employes an assistant and the deli becomes more successful
Eventually Pat would realise he can't do it all on his own and that he should get some help in order to make a profit
B
A
* Numbers are rounded up
Total output increases as extra worker is employed
5th workers extra contribution is a fall from the 4th
Avg output per worker falls
How would we represent this on a graph?

Where would the diminishing returns set in?
Average cost = (TC/Q) or (AFC + AVC)
FC/Q = AFC
VC/Q = AVC
Average costs also includes normal profit
Normal profit
= the return that sufficiently rewards the risk-taking of an entrepreneur and it must be earned to stay in business
Pat's Deli = Short Run production costs
Quantity
Fixed costs
Variable costs
Total costs
Averages
Marginal costs (change in TC)
If MC is rising = Avg cost of production is increasing
TC of 15 employees: 15 x €200 = €3,000
TC of 16 employees: 16 x €210 = €3,360
The MC of the 16th worker = €360
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