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Chapter 8

Chapter 8. Costs of Production. 10/9/2014. What is a Fixed Cost?. Cost to a firm that does not vary with the quantity of goods produced. What are examples of Fixed Costs?. rent or mortgage a part of utilities. Fixed Cost is also known as…. Sunk Cost. What is a Variable Cost?.

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Chapter 8

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  1. Chapter 8 • Costs of Production 10/9/2014

  2. What is a Fixed Cost? • Cost to a firm that does not vary with the quantity of goods produced

  3. What are examples of Fixed Costs? • rent or mortgage • a part of utilities

  4. Fixed Cost is also known as….. • Sunk Cost

  5. What is a Variable Cost? • Cost that varies with the quantity of goods produced

  6. What are examples of Variable Costs? • worker’s wages • raw materials • some utilities • some taxes

  7. What isLabor Productivity? • The output per laborer per hour

  8. Under what condition is it cheaper to pay $10 an hr. to a U.S. worker than $1 an hour to a foreign worker?

  9. If the U.S. worker is more than 10 times as productive as the foreign worker

  10. Why do labor costs per unit of output changes as more units of labor are hired? • Price of labor increases • Quality of labor decreases • Labor productivity Changes

  11. Why do non-labor, variable costs per unit of output increase as output increases? • Resources become more scarce

  12. Does the cost of all resources increase more than production increases? • No, the costs of some resources may vary proportionately with the level of production

  13. What isTotal Variable Cost? • The sum of specific variable costs in the firm’s cost structure

  14. Total Variable Costs $ Q

  15. What are Total Costs? • Cost to the firm that includes both fixed and variable costs

  16. TC Total Costs $ TVC TFC Q

  17. What isAverage Total Cost? • Total cost divided by the quantity of goods produced

  18. $ TVC TC 10 ATC = 9 5/2 = 2.5 8 7 6 5 ATC = 4 6/5 = 1.2 3 6 5 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  19. $ 10 9 8 7 ATC 6 5 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  20. What isAverage Variable Cost? • Total variable cost divided by the quantity of goods produced

  21. $ 10 9 TVC 8 7 6 5 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  22. $ 10 9 8 7 ATC 6 5 AVC 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  23. What isAverage Fixed Cost? • Total fixed cost divided by the quantity of goods produced

  24. Costs AFC Quantity 24

  25. What isMarginal Cost? • The change in total cost incurred by adding onemore unit of output to production

  26. TC MC = Q If the only thing we observe is a change in total cost associated with a small change in output produced then MC is computed in the following way.

  27. $ TC 10 MC = 9 3/3 = 1 8 3 7 6 5 3 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  28. $ TC 10 9 8 7 6 5 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  29. TC, TVC, TFC TFC Q1 Q2 Q3 0 Q ATC MC AVC AFC 0 Q

  30. MC • Costs Avg. Fixed Costs ATC AVC Quantity

  31. Why does MC = ATC at minimum ATC? • If the marginal is above the average, the average increases • If the marginal is below the average, the average decreases

  32. $ 10 MC 9 ATC 8 7 AVC 6 5 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  33. $ 10 MC 9 ATC 8 7 AVC 6 5 4 3 2 1 Q 0 1 2 3 4 5 6 7 8 9 10

  34. What is the Short Run? • A time in which producers can change some, but not all of its resources

  35. What is the Long Run? • The time in which producers can change quantity of all resources

  36. Short-run Vs. Long-run Average Cost $ per unit of Output SRACD SRACC SRACA SRACB LRAC Q2 Q3 Q Q1 0

  37. What areEconomies of Scale? • When a firm increases resources in the long run and ATC decreases

  38. What areDiseconomies of Scale? • When a company increases resources in the long run and ATC increases

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