Download
1 / 30
E N D
The Costs Of Production Shaikha Salah AlMidfa 201017515 AfraHumaid AlShamsi 201015205 Fatima Obaid Al Suwaidi 201010455 Fatma Ahmed AlFalasi 200911404
CONTENT Total Revenue, Total Cost, and Profit Opportunity Costs Economic Profit vs. Accounting Profit Production & Costs The Various Measures Of Costs Costs In The Short & Long Run
Cost Of Production Cost: “An amount that has to be paid or given up in order to get something.” What controls the behavior of a producer? (http://www.businessdictionary.com/definition/cost.html#ixzz1vKqC0lpM)
Industrial Organization The study of how firms decisions about prices and quantities depend on the market conditions they face. • Examples on Market Conditions: • Number of Competitors • What and how much a customer demands
Achieving profit Profit = Total Revenue – Total Cost Total Revenue: The amount a firm receives for the sale of its output Total Cost: The market value of the inputs a firm uses in production
Opportunity Costs “The cost of something is what you give up to get it” Ten Principles Of Economics Explicit Costs: Input costs that require an outlay of money by the firm - Wages - Rent Payments - Utilities Implicit Costs: Input costs that do not require an outlay of money by the firm
Economists Vs. Accountants Economists are interested in production & pricing decisions Implicit Costs Explicit Costs Accountants are interested in keeping track of money flows Implicit Costs Explicit Costs
The Cost Of Capital Is An Opportunity Cost The Opportunity Cost of the financial capital that has been invested in the business is an important implicit cost. Capital: $ 900,000 $ 18,000 (2%) Annual > or < 18,000 ? Opportunity Cost
Economic & Accounting Profit Economic Profit: Total revenue minus total cost (including both explicit & implicit costs) Accounting Profit: Total revenue minus total explicit cost * Accounting Profit > Economic profit Because Implicit costs are ignored.
Production function Quantity of output (cookies per hour) 100 80 60 40 20 0 1 2 3 4 5 Number of workers hired
Total cost curve Marginal product Total cost 60 50 40 30 20 10 Quantity of output (cookies per hour) 0 20 40 60 80 100 120
Production function 50 40 30 20 10 Diminishing marginal product
Fixed and variable costs • Fixed costs (FC): costs that do not vary with the quantity of output produced. • Variable costs (VC): costs that vary with the quantity of output produced. • Total cost (TC) = FC + VC
Example of the various measures of cost: Conrad’s coffee shop
Average and marginal cost • Average total cost = total cost/quantity ATC = TC/Q • Marginal cost : the increase in total cost that arises from an extra unit of production. Marginal cost = change in total cost/change in quantity MC = ∆TC/ ∆Q
Cost curves and their shapes: • average total cost (ATC): total cost divided by the quantity of output. • Average fixed cost (AFC): fixed cost divided by the quantity of output. • Average variable cost (AVC): variable cost divided by the quantity of output. • Marginal cost (MC): the increase in total cost that arises from an extra unit of production.
The cost curves shown here for Conrad’s coffee shop have some features that are common to the cost curves of many firms in the economy. • Rising marginal cost • U-shaped average total cost • The relationship between marginal cost and average total cost.
The division of total costs between fixed and variable costs depends on the time horizon.
Short Run • Example: Ford Motor Company • Size of the factory is fixed in the short run • To vary quantity of cars produced, ford will have to change the number of workers they employ. • Increase in quantity of cars produced, increases the cost.
Diminishing Marginal Returns: “A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.” • Problem of overcrowding
Long Run • Example: Ford Motor Company • Inputs are variable in the long run • Firms can expand the size of factories, build new factories or close old ones. • Ford can expand both the size of the factory and the workforce
LRATC Curve Firm can choose from 3 factory sizes: S, M, L. The firm can change it’s factory size in the long run not in the short run.
LRATC Curve • To manufacture less than QA, in the long run the firm will choose size S. • To manufacture between QA and QB, in the long run the firm will choose size M. • To manufacture more than QB, in the long run the firm will choose size L.
Scale of Production • Economies of scale: Long run average total cost falls as the quantity of output increases. • Constant returns to scale: Long run average total cost stays the same as the quantity of output changes • Diseconomies of scale: Long run average total cost rises as the quantity of output increases
Scale of Production • Economies of Scale: Allows specialization among workers. • It allows each worker to become better at a specific task • Example: Assembly Line • Diseconomies of scale: Coordination problem • The more stretched the management become. It becomes less effective. QUIZ
Quick Quiz • Profit = Total Revenue + Total Cost • Accountants include Explicit & Implicit Costs • Fixed costs do not vary but variable costs do False False True
