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Pr. of Eco - Prod & Cost
Pr. of Eco - Prod & Cost
Pr. of Eco - Prod & Cost
Production
and
Cost
2
Production Function
Y
Y = F(x)
2. As more
input added,
MP declines
1. The slope of
production function
equals marginal
product
With the
available
technology
This curve
shows how
output
depends on
input
A numerical example
Units of Total product Marginal
Average
labor (a) (b)
product (c) product(d=b/a
)
2000
2000
2000
3000
1000
1500
3500
500
1167
3800
300
950
3900
100
780
Production Function
Outpu
t, Y
1
MP
L
MP
1 L
MP
L
2. As more
labor is added,
MPL declines
1. The slope of
production function
equals marginal
product
This curve
shows
how
output
depends
on labor
input,
holding
the
amount of
capital
constant
Labor,
L
8
Margin
al
product
MPL = dQ/dL
Measures the output
produced by the last worker.
Slope of the production
function
Labor
Production Function
Diminishing Marginal Product
10
11
12
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$80
70
60
50
40
30
20
10
10 20 30 40 50 60 70
Quantity
of Output
(cookies per hour)
13
14
TC
VC(Q)
Total Cost
=Fixed Cost + Variable
Cost
F
C
15
$15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0
Quantity
of Output
(glasses of lemonade per hour)
8
10
16
Average Costs
Average costs can be determined by dividing the
firms costs by the quantity of output it produces.
The average cost is the cost of each typical unit
of product.
Average Fixed Costs (AFC)
Average Variable Costs (AVC)
Average Total Costs (ATC)
ATC = AFC + AVC
17
Average Costs
F ix e d c o s t F C
AFC
Q u a n tity
Q
V a ria b le c o s t V C
AVC
Q u a n tity
Q
T o ta l c o s t T C
ATC
Q u a n tity
Q
18
Marginal Cost
( c h a n g e in to ta l c o s t) T C
M C
(c h a n g e in q u a n tity )
Q
19
Marginal Cost
Quantity
0
1
2
3
4
5
Total
Cost
Marginal
Cost
$3.00
3.30 $0.30
3.80
0.50
4.50
0.70
5.40
0.90
6.50
1.10
Quantity
6
7
8
9
10
Total
Cost
$7.80
9.30
11.00
12.90
15.00
Marginal
Cost
$1.30
1.50
1.70
1.90
2.10
20
MC
2.00
1.75
1.50
ATC
1.25
AVC
1.00
0.75
0.50
AFC
0.25
0
Quantity
of Output
(glasses of lemonade per hour)
9
10
21
produced.
22
MC
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
Quantity
of Output
(glasses of lemonade per hour)
9
10
23
24
25
MC
2.00
1.75
ATC
1.50
1.25
1.00
0.75
0.50
0.25
0
Quantity
of Output
(glasses of lemonade per hour)
9
10
27
28
Average
Total
Cost
ATC in short
run with
small factory
$12,000
1,200
Quantity of
Cars per Day
Copyright 2004 South-Western
30
31
32
33
Total Cost
34
cost.
35
How an Economist
Views a Firm
How an Accountant
Views a Firm
Economic
profit
Accounting
profit
Revenue
Implicit
costs
Explicit
costs
Revenue
Total
opportunity
costs
Explicit
costs
38
Copyright 2004 South-Western