ECON10004 Lecture Notes - Lecture 6: Average Variable Cost, Marginal Cost, Marginal Product

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OC2445316

12 May 2018

School

University of Melbourne

Department

Economics

Course

ECON10004

Professor

Eik Lee

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Microeconomics Week 6

CHAPTER 13: THE COSTS OF PRODUCTION

Total Revenue (for a firm): the amount a firm receives for the sale of its output

Total Cost: the amount a firm pays to buy the inputs into production

Profit: total revenue minus total cost

Costs as Opportunity Costs

• Explicit costs such as $1000 for flour and $100 for wages

• Implicit costs such as sacrificing $100 an hour during business as the owner can make

$100 doing another job/activity

• Total cost is the sum of explicit and implicit costs

The cost of Capital as an Opportunity Cost

• Important implicit cost of most businesses: the opportunity cost of the financial

capital invested in business

Economic Profit versus Accounting Profit

PRODUCTION AND COSTS

Long Run: the period of time needed for all factors of production to become variable

Short Run: a period of time during which at least one factor of production is fixed

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The Production Function

Production Function: the relationship between quantity of inputs used to make a good and

the quantity of output of that good

Marginal Product: the increase in output that arises from an additional unit of input

Diminishing Marginal Product: the property whereby the marginal product of an input

declines as the quantity of the input increases

From the production function to the total-cost curve

• I Poh’s akes eaple, total ost is ost of fator ad ost of orker/s

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THE VARIOUS MEASURES OF COST

Fixed Costs: costs that do not vary with the quantity of output produced

Eg. Rent

Variable Costs: costs that vary with the quantity of output produced

Eg. Cost of milk, beans and sugar to produce coffee

Average and Marginal Costs

Average Total Cost: total cost divided by the quantity of output

• Because total cost is sum of fixed and variable costs, average total costs can be

expressed as the sum of average fixed cost and average variable cost

• Tells cost of typical unit but not how much total costs will change as the firm alters

its level of production

Average Fixed Cost: fixed costs divided by the quantity of output

Average Variable Cost: variable costs divided by the quantity of output

Marginal Cost: the increase in total cost that arises from an extra unit of production

• Eg. If George increase production from two to three cups and cost rises from $3.80

to $4.50, marginal cost of third cup of coffee is $4.50 – $3.80 = $0.70

ATC = TC / Q

MC = ΔTC / ΔQ

• TC = Total Cost

• Q = Quantity of product

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Document Summary

Total revenue (for a firm): the amount a firm receives for the sale of its output. Total cost: the amount a firm pays to buy the inputs into production. Costs as opportunity costs: explicit costs such as for flour and for wages. Implicit costs such as sacrificing an hour during business as the owner can make. doing another job/activity: total cost is the sum of explicit and implicit costs. The cost of capital as an opportunity cost. Important implicit cost of most businesses: the opportunity cost of the financial capital invested in business. Long run: the period of time needed for all factors of production to become variable. Short run: a period of time during which at least one factor of production is fixed. Production function: the relationship between quantity of inputs used to make a good and the quantity of output of that good.

Related Questions

26. To the economist total cost includes

A. explicit and implicit costs.

B neither implicit nor explicit costs.

C. implicit, but not explicit, costs.

D. explicit, but not implicit, costs.

27. Accounting profits are typically

A. greater than economic profits because the former do not take explicit costs into account

B. equal to economic profits because accounting costs include all opportunity costs.

C. smaller than economic profits because the former do not take implicit costs into account.

D. greater than economic profits because the former do not take implicit costs into account.

28. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were

A. $100,000 and its economic profits were $0.

B. $200,000 and its economic profits were $0.

C. $100,000 and its economic profits were $100,000.

D. $0 and its economic loss was $200,000.

29. The basic difference between the short run and the long run is that

A. all costs are fixed in the short run, but all costs are variable in the long run.

B. the law of diminishing returns applies in the long run but not in the short run.

C. at least one resource is fixed in the short run, while all resources are variable in the long run.

D. economies of scale may be present in the short run but not in the long run.

30. The law of diminishing returns indicates that

A. as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.

B. because of economies and diseconomies of scale, a competitive firm's long-run average total cost curve will be U-shaped.

C. the demand for goods produced by purely competitive industries is downsloping.

D. beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.