Marginal Product and Marginal Cost

Transcription

1 Marginal Product and Marginal Cost

2 4. 3rd (decreases from 10, 15 to 11) 5. Greater than a higher MP will increase TP and thus increase APP 6. No, neither output or labor can be negative 7. Yes, if an additional worker disrupts production, TP will decrease. 8. Positive if MP is positive, each additional worker is still adding to TP 9. Negative. If MP is negative, TP will decrease. No firm would ever hire an additional worker if they caused TP to fall. Even when MP is diminishing, each worker will still increase TP, just at a lower rate. 10. When MP is positive, then TP will increase. When MP is negative, then TP will fall. 11. MP>AP, then AP will rise. MP<AP, then AP will fall.

3 12. At L2 (after L1), MP falls 13. Greater than increasing MP increase TP 14. Less than decreasing MP decreases TP 15. APP = MPP 16. Not true, between L1 and L2, MMP is decreasing but APP is still increasing bcmmp > APP 17. Less than 18. Greater than 19. MC = AVC since when MC > AVC, AVC increases and when MC < AVC, AVC decreases 20. Not true, between Q1 and Q2, MC is increasing but AVC is still increasing bcmc <AVC

4 21.Decrease workers are more productive due to specialization; greater productivity will lower costs 22.Increase MP decreases due diminishing marginal returns; lower productivity will increase costs. 23.L1 since productivity (MPP) is maximized 24. Decrease - when output increases, costs will fall 25. Increase when output falls, costs will rise 26.Maximized at L2Q2 bcapp is at its highest.

5 Production Costs KEY 1. a. Fixed: shop, machines, refrigerators. Variable: mix, cups, toppings, workers b. See graph c. Diminishing marginal returns (not enough resources to go around) Q of Labor voutput MP # MC= Q of Labor Output FC VC-W VC-I VC TC MC $ $ $ $ $ $8.50 Change in Total Costs Change in Output From 0 to 1 worker: TC: = $1.23 Q: # VC TC

6 Q of Cars TC FC VC AVC ATC AFC MC 0 500, , , ,000 40,000 40, , ,000 40, , ,000 60,000 30, , ,000 20, , ,000 70,000 23, , ,667 10, , ,000 90,000 22, , ,000 20, , , ,000 24, , ,000 30, , , ,000 26, ,000 83,333 40, , , ,000 31, ,857 71,429 60, , , ,000 37, ,000 62,500 80, , , ,000 46, ,222 55, , ,100, , ,000 60, ,000 50, , Fixed Cost = $500,000 Min ATC = $100,000 8 cars 4. Skipped 600, ,000 Chart Title 5. a. ATC = $40/4 =$10 400, ,000 b. $ = $45 $45/5 = $9 ATC will decrease since MC <ATC 200, , c. $40 + $20 = $60 $60/5 = $12 ATC will increase since MC > ATC AVC ATC MC

7 MC ATC MC crosses ATC at its minimum AFC decreases dues to the spreading effect

8 Figure 5 Thirsty Thelma s Total Costs Average-Cost and Marginal-Cost Average Costs Curves Costs $ Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC) TC= TFC+ TVC MC ATC AVC AFC Quantity of Output (glasses of lemonade per hour) Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC) ATC= AFC+ AVC Copyright 2004 South-Western

9 Costs (dollars) Per-Unit Costs MC ATC AVC AFC MC of the 11 th unit? ATC of the 11 th unit? AVC of the 11 th unit? Min ATC? TC of 11 units? Quantity

10 (C) $6 (ATC) x 20 = 120 TC = 120 $6 (ATC) - $5 (AVC) = $1 x 20 TFC= 20

11 TC VC FC At output Q, what area represents: 0CDQ 0BEQ 0AFQ or BCDE 64

12 Shifting Cost Curves 65

13 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC What if fixed costs increase to $

14 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC

15 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC

16 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC Which Per Unit Cost Curves Change? 69

17 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC ONLY AFC and ATC Increase! 70

18 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC ONLY AFC and ATC Increase! 71

19 Shifting Costs Curves If fixed costs change ONLYAFC and ATC Change! TP VC FC TC MC AVC AFC ATC MC and AVC DON T change! 72

20 Shift from an increase in a Fixed Cost MC ATC 1 Costs (dollars) ATC AVC AFC 1 AFC Quantity 73

21 Shift from an increase in a Fixed Cost MC ATC 1 Costs (dollars) AVC AFC 1 Quantity 74

22 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC What if the cost for variable resources increase

23 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC

24 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC

25 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC Which Per Unit Cost Curves Change? 78

26 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC MC, AVC, and ATC Change! 79

27 Shifting Costs Curves TP VC FC TC MC AVC AFC ATC MC, AVC, and ATC Change! 80

28 Shifting Costs Curves If variable costs change MC, AVC, and ATC Change! TP VC FC TC MC AVC AFC ATC

29 Shift from an increase in a Variable Costs MC1 MC Costs (dollars) ATC 1 AVC 1 ATC AVC AFC 82 Quantity

30 Shift from an increase in a Variable Costs MC1 ATC 1 AVC 1 Costs (dollars) AFC 83 Quantity

31 4. a. Labor is a variable cost so ATC and MC will increase. Same answer even if labor is both a variable and fixed cost. b. 350 #1 TP MP2 c. MC2 d. If a firm increases its productivity, it will decrease its ATC2 production costs.

32 Costs of Production Total Revenue -the amount a firm receives for the sale of its output. Total Cost -the value of the inputs a firm uses in production. Profit is the firm s total revenue minus its total cost. Profit = Total revenue -Total cost

33 Accountants look at only EXPLICIT COSTS Explicit costs (out of pocket costs) are payments paid by firms for using the resources of others. Example: rent, wages, materials Accounting profit = total revenue explicit costs (and depreciation) Economists examine both the EXPLICIT COSTS and the IMPLICIT COSTS Implicit costs are the opportunity costs that firms pay for using their own resources Example: forgone wage, rent, time Economic profit = total revenue explicit costs and implicit costs

34 You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could be an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. Accounting profit = total revenue explicit costs (and depreciation) ACCOUNTING PROFIT $200,000 (total revenue) $100,000 (cost of bikes) $20,000 (electricity, taxes, and other expenses) = $80,000

35 You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could be an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. Economic profit = total revenue explicit costs and implicit costs OPPORTUNITY COST? ECONOMIC PROFIT: $200,000 (total revenue) $100,000 (cost of bikes) $20,000 (electricity, taxes, and other expenses) $40,000 (opportunity cost of your time) $50,000 (opportunity cost of not renting the store) = -$10,000 not renting the store for $50,000 and $40,000 salary So although you make an accounting profit each year, you would be better off renting the store to the large chain and being an accountant since your opportunity cost of continuing to run your own store is too high.

36 Economic Profits Positive economic profit = TR > implicit + explicit DO IT! Negative economic profit = TR < implicit + explicit SKIP IT! Economic profit is never higher than accounting profit since it includes opportunity costs. Thus it is possible for a firm to earn positive accounting profits and zero economic profit. Should a firm be worried if it is earning zero economic profits? No, a firm earning zero (normal) economic profit has still earned enough revenue to cover explicit and implicit costs. Since its not negative, it means the firm could not do any better using its resources in an alternative activity.

37 You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could be an accountant and receive a yearly salary of $30,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. Economic profit = total revenue explicit costs and implicit costs OPPORTUNITY COST? ECONOMIC PROFIT: $200,000 (total revenue) $100,000 (cost of bikes) $20,000 (electricity, taxes, and other expenses) $30,000 (opportunity cost of your time) $50,000 (opportunity cost of not renting the store) = $0 not renting the store for $50,000 and $30,000 salary You should own and operate the bike store since you have earned normal profits. Your accounting profit is $80,000 and that s what you would now pay yourself for owning the bike store. In this scenario, you would not be better off being an accountant and renting out your store.

38 Economic Profits Positive economic profit = TR > implicit + explicit DO IT! A positive economic profit indicates the current use is the best use of resources. Negative economic profit = TR < implicit + explicit SKIP IT From now on, we are only concerned with ECONOMIC COSTS A negative economic profit indicates there is a better alternative use of resources. Economic profit is never higher than accounting profit since it accounts for opportunity costs. Thus it is possible for a firm to earn positive accounting profits and zero economic profit. Should a firm be worried if it is earning zero economic profits? No, a firm earning zero/normal economic profit has still earned enough revenue to cover his/her implicit and explicit costs. Since its not negative, it means the firm could not do any better using its resources in an alternative activity.

39 Costs (dollars) TC of 11 units? If each unit sells for $7, what is total revenue? Economic profit? MC Should the producer exit this industry? ATC AVC No, the producer is earning zero (normal) economic profits, which means he/she is earning positive accounting profits. AFC Quantity

40 Long-Run Production and Costs

41 In the long run all resources are variable. Plant capacity/size can change. In the short run, a firm can only move along its current ATC curve However, in the long run it can move from one ATC curve to another by varying the size of its plant

42 Firms will adjust their output in the LR. Each adjustment will correspond with a new ATC. Costs $9,900,000 MC1 ATC 1 $50,000 $6,000 $3, , ,000 1,000,0000 Quantity Cars 95

43 Costs $9,900,000 MC1 ATC 1 MC2 $50,000 ATC 2 $6,000 $3, , ,000 1,000,0000 Quantity Cars 96

44 Economies of Scale As output increases, FC is more spread out. Firms that produce more can better use mass production techniques and specialization Costs $9,900,000 $50,000 MC1 causing ATC to fall. Firms have increasing returns to scale an increase in inputs leads to a greater MC2 proportional increase in output. ATC 1 ATC 2 MC3 Input increase by 10% and output increases by 15% ATC 3 $6,000 $3, , ,000 1,000,0000 Quantity Cars 97

45 Constant Returns to Scale ATC reaches its minimum Costs $9,900,000 MC1 ATC 1 Increases in inputs are proportional to increases to output. MC2 $50,000 ATC 2 MC3 MC4 ATC 3 ATC 4 $6,000 $3, , ,000 1,000,0000 Quantity Cars 98

46 Costs $9,900,000 MC1 ATC 1 $50,000 MC2 MC3 MC4 MC5 ATC5 ATC 2 ATC 3 ATC 4 $6,000 $3, , ,000 1,000,0000 Quantity Cars 99

47 Diseconomies to Scale Costs $9,900,000 MC1 ATC 1 firm gets too big and becomes difficult to manage causing ATC to rise Firms have decreasing returns to scale - output increases less than the proportional increase in inputs. $50,000 MC2 MC3 MC4 MC5 ATC5 ATC 2 ATC 3 ATC 4 $6,000 $3, , ,000 1,000,0000 Quantity Cars 100

48 Long Run AVERAGE Total Cost Costs $9,900,000 MC1 Long-run ATC curve is made up of different shortrun ATC curves of various plant sizes. ATC 1 $50,000 MC2 MC3 MC4 MC5 ATC5 ATC 2 ATC 3 ATC 4 $6,000 $3, , ,000 1,000,0000 Quantity Cars 101

49 Long Run AVERAGETotal Cost Costs Economies of scale - long-run average total cost falls as the quantity of output incre ases. Diseconomies of scale - long-run average total cost rises as the quantity of output incre ases. Increasing returns to scales Decreasing returns to scale Long Run Average Cost Curve Constant returns to scale -long-run average total cost stays the same as the quantity of output incre ases Economies of scale Constant returns to scale Diseconomies of scale , ,000 1,000,0000 Quantity Cars 102

50 Long Run AVERAGE Total Cost Costs $9,900,000 MC1 A firm will choose the ATC curve among all of the ATC curves available that enables it to produce at lowest possible average total cost ATC 1 $50,000 MC2 MC3 MC4 MC5 ATC5 ATC 2 ATC 3 ATC 4 $6,000 $3, , ,000 1,000,0000 Quantity Cars 103

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