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MP increases as
L (quantity of labor) increase Diminishing Marginal Returns:
MP decreases as L increases Production Function - the mechanism for combining production resources, with existing technology, into finished goods Short-Run Costs Total Fixed Costs (TFC) - cost that do not vary with the level of output, even if at zero Unit 3: Cost of Production and Pure Competition by: Ying Liu, Esai Orozco, Amy Sanchez, Michael Rios, and David Gayosso Chapters: 22 and 23 E-Commerce "Electronic Commerce" a type of firm that buys and sells products online What Are Your Cost? storage $12/month Explicit Costs $12 + $50 + $100 = $162 - the "out of pocket" payments for other
people's resources. Internet Speed $50/month Website Design Software $100/month Toby only accounted for his explicit costs! Economist look at both Explicit and Implicit Cost. Implicit Cost - are the opportunity cost that firms pay for using their own resources. + = Implicit Costs Economic Cost = Explicit Cost + Implicit Cost Economic Profit = TR - Economic Cost Accounting Profit = $1000 - $444 = $556 Toby's Total Revenue (TR) = $1000 $20/hour * 144 hours/month ($2880) $10/hour * 60 hours/month ($600) $3480 + = $12 per seller * $ 6 per buyer = $18 per deal Economic Profit = $1000 - $444 - $3480 = -$2924 Short-Run - a time period when at least one production input is fixed. Fixed Input - cannot be changed, to respond to a change in product demand Long Run - all inputs are variables 3 production measures Total Product (TP) - the total quantity, or total output, of a good produced at each quantity employes Marginal Product (MP) - the change in total product resulting from a change in labor input. Average Product (AP) - a measure of average productivity and is total product divided by the amount of labor employed AP = TP/L MP = TP / L if labor is changing one unit at a time MP = TP Law of Diminishing Marginal Returns - as successive units of variable resource are added to a fixed resource, beyond some point the marginal product falls (does not apply in the Long Run) 3 stages of Returns-Stage I Stage II Stage III Negative Marginal Returns:
MP becomes negative as L increases
TP is decreasing because workers get in each other's way. Total Variable Costs (TVC) - costs that change with the level of output. If output is zero, so are variable costs. Total Cost (TC) - sum of total fixed and total variable costs at each level of output TC = TVC + TFC Marginal Cost (MC) - the additional cost of producing one more unit of output Average Fixed Cost (AFC) - total fixed cost divided by output Average Variable Cost (AVC) - total variable cost divided by output Average Total Cost (ATC) - total cost divided by output MC = AFC =TFC/Q AVC = TVC/Q ATC = TC/Q Variable Inputs - inputs that can be adjusted to meet changes in demand Units of Labor Total Product 0 1 2 3 4 5 6 7 0 packages 5 15 30 40 45 40 30 Units of Labor Total Product 0 1 2 3 4 5 6 0 packages 5 15 30 40 45 40 Marginal Product - 5 - 0 = 0 10 15 10 5 - 5 - 10 7 30 Units of Labor Total Product 0 1 2 3 4 5 6 0 packages 5 15 30 40 45 40 Marginal Product - 5 - 0 = 0 10 15 10 5 - 5 - 10 7 30 Average Product - 5/1 = 5 7.5 10 10 9 6.67 4.29 TP is increasing at an increasing rate due to SPECIALIZATION TP is increase at a decreasing rate because with fixed resources, each additional worker adds less and less -When MP increase, MC falls
-MP and MC are "mirror" images of one another
-When MC is below ATC, it is pulling the average down
-MC intersect the ATC at its lowest point
-MC falls and rises again because of the Law of Diminishing Marginal Returns Production Costs Graphic Representation Change in Total Cost/Change in Q Quantity
of Labor FC VC TC 1 3 2 4 5 6 0 10 0 10 10 10 10 10 10 10 5 8 10 11 15 22 15 18 20 21 25 32 MC AVC ATC AFC - 5 3 2 1 4 - 7 - - 5 4 3.3 2.75 3 3.67 1.67 2 10 5 3.3 15 2.5 9 6.6 5 5.25 5.34 AFC AFC AFC AVC ATV MC Price Quantity Why is the MC curve U-shaped? How do we Shift Cost Curves? By shifting the FC or VC -Change of FC ONLY affects
AFC and ATC
-Change of VC affects MC, AVC,
and ATC In the LONG RUN~~~ -All resources are variable
-Plant size is changeable
-Long run ATC is made up of all the short run ATCs' *Economies of Scale-long run average cost decrease due to production techniques *Constant Returns to Scale-long run average cost is at its lowest point *Dis-economies of Scale-long run average cost increase because the firm becomes unmanageable Price Quantity Economies
of Scale Constant
of Scale LONG RUN
ATC ***Use Notes*** 1.Economic cost includes:
d.a and b
e.a, b, and c 2.Out-of pocket costs are:a.Implicit costb.Explicit costc.Economic costd.a and ce.b and c 3.Which is a characteristic of short run?a.No fixed costsb.Firms can enter and leave the industry at any timec.The law of diminishing returns does not applyd.There is at least one fixed resourcee.The firm is able to change its plant size at any time 4.The law of diminishing marginal returns is best defined as:a.As additional units of variable resources are added, the marginal product eventually decreasesb.There is a downslope line for the demand of a good in the competitive firmc.As additional units of variable resources are added to a fixed resource, the marginal return will decline after a certain outputd.As additional units of product is consumed, the additional satisfaction a consumer gets will eventually get smallere.Producing more than the equilibrium output 5.If the total fixed cost is $200, total variable cost is $500, price is $120 per unit, and the firm is producing 5 outputs,a.Marginal cost is $60b.Average total cost is $70c.Economic profit is $100d.Economic loss is $100e.Total revenue is $400 6.With constant price, as output increases,a.Fixed cost increasesb.Variable cost increasesc.Variable cost maintains constantd.Total fixed cost increasese.Marginal revenue increases 7.What is a sunk cost?a.Incurred and unrecoverable costb.Inventory costc.Incurred cost which can be changed is actions are takend.Cost which only consumers pay offe.Dead weight loss 8.Which of the following is false?a.Marginal cost curve intersects with AVC and ATC at minimum pointsb.FC decreases as outputs increasesc.An increase in per unit variable cost will shift the MC, ATC and AVCd.When MC is less than ATC, ATC is fallinge.MC is change is TC divided by change in quantity Sunk Cost-Incurred and unrecoverable cost Graphing Costs Accounting Profit = TR - Explicit Cost