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The Cost Curve Model

The Cost Curve Model. Cost Curves. Chapter 13. Review: The Production Function. TP. ( total output ). Law of diminishing Marginal product. AP. MP. ( average output Per-worker). Shape of product curves will determine shape of costs curves. ( marginal output Next worker).

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The Cost Curve Model

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  1. The Cost Curve Model Cost Curves Chapter 13

  2. Review: The Production Function TP (total output) Law of diminishing Marginal product AP MP (average output Per-worker) Shape of product curves will determine shape of costs curves (marginal output Next worker)

  3. Opportunity Costs • A firm’s cost curves must include all opportunity costs • Both explicit & implicit • Explicit costs- input costs that require a direct outlay of money • Example:attending college => tuition, books, etc…. • Implicit costs- input costs that do not require an outlay of money • Example:attending college => can’t work (loss of income)

  4. Economic Profit vs.Accounting Profit • Economic profit= total revenue - total costs • both explicit & implicit costs • Accounting profit=total revenue - explicit costs • no implicit costs! • Economic profit is smaller than accounting profit • Firms maximize economic profit • All cost curves include both implicit & explicit costs

  5. 1) Value of your time 2) Loss of interest income on money invested 3) Etc…. Economic Profit $825 Accounting Profit $900 Implicit Costs $75 Total Revenue $1,000 Total Revenue $1,000 Total opportunity costs Explicit Explicit Costs $100 Costs $100 Anything paid for in dollars Economists vs. Accountants How an Economist How an Accountant Views a Firm Views a Firm

  6. Costs of Production • Fixed costs - do not change with quantity of output • Rent on factory, machinery, insurance, etc…. (they are sunk!) • Variable costs - increasewith quantity of output • Cost of workers, cost of other inputs, etc… • Marginal cost increase in total cost from next unit of production • Cost to produce one additional good or service Total Costs = Fixed Costs+ Variable Costs

  7. Marginal Costs (MC) = ∆ Total Cost . Total Cost @ 3 units:$4.50 Total Cost @ 4 units:$5.40 MCof 4th unit = $0.90 ($5.40 - $4.50 = +0.90)

  8. Total Variable Costs Total Fixed Costs Total Cost Cost Curve Model Cost Curve Model uses average cost curves AFC = TFC/Qty AVC = TVC/Qty ATC = TC/Qty MC = ∆ TC/ ∆ Qty

  9. Worksheet:Cost Curve Model

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