Businesses

1
Businesses
Als Sub Shop
Al and Dales Sub Station
Subway
2
Businesses
Liability
Sharing
Limited?
Knowledge?
Number of Owners
Financing?
Unlimited?
Profits?
proprietorship
______
______
___
______
______
___
partnership
______
______
___
corporation
3
Businesses
Number
Receipts
proprietorship
partnership
corporation
8
10
20
5
72
85
4
Business
explicit
Costs
implicit
total
economic
Profits
normal
accounting
5
Production Costs
Total Fixed Costs
rent
Do not change with output
Total Variable Costs
bourbon scotch beer
Do change with output
Total Costs TFC TVC
Production times
Long Run
The factory size can change
Short Run
Factors like labor and raw
materials can be changed
labor
raw materials
6
Unit Production Costs
Average Fixed Costs
Average Variable Costs
Average Total Costs ??
Marginal Cost
Change in cost with 1 more output
Do change with output
Do not change with output
7
A Problem
Marcia Deal
bakes and decorates large,
elaborate, multi-layered, special occasion cakes.
She produces these in her own home without any
help, unless she has a large number of orders on
a particular day.
8
The Problem
With the following information, complete the table
The total cost of producing 5 cakes is 135
Marcias total fixed cost for 1 cake is 25
The marginal cost for the 8th cake is 91
The ATC per cake when 3 cakes or when 4 cakes are
made is 25
The total variable cost of producing 7 cakes is
220
The marginal cost of the 6th cake is 45
The total cost of 2 cakes is 60
The total variable cost for 1 cake is 25
Why is the Marginal Cost of the 7th and 8th cakes
fairly high?
9
(No Transcript)
10
120 110 100 90 80 70 60 50 40 30 20 10 0
Average Total Cost and Marginal Cost
1 2 3 4
5 6 7 8
Number of Cakes
11
If Marcia can sell from 0 - 8 cakes at 40 each,
how many will she choose to produce and sell per
day if she is trying to maximize her profits??
Complete the table to check
Do the numbers in the Total Profit column and in
the Marginal Revenue and Marginal Cost columns
support that?
12
(No Transcript)
13
On the graph, plot the total cost of producing
from 0 8 cakes.
Use the data from the table
On the second graph, plot the average total cost
and marginal cost of producing from 0 8 cakes.
Plot the marginal cost at the midpoints
Why does total cost exhibit this pattern in this
exercise?
14
350 300 250 200 150 100 50 0
Total Cost
1 2 3 4
5 6 7 8
Number of Cakes
15
The Production Function
Output TFC TVC TC
0 100 0
100 150 190 220 260 320 400 500 620 770 1000
1 50
___
___
100 100 100 100 100 100 100 100 100 100
___
___
2 90
___
___
3 120
___
___
4 160
5 220
___
___
___
___
6 300
7 400
___
___
___
___
8 520
9 670
___
___
___
___
10 900
16
The Production Function Costs
Output AFC AVC ATC MC
50 40 30 40 60 80 100 120 150 230
0 (TFC/output) (TVC/output) (TC/output)
(TC1-TC0)
50 45 40 40 44 50 59 65 74 90
150 95 73 65 64 67 73 78 85 100
100 50 33 25 20 17 14 12 11 10
1 2 3 4 5 6 7 8 9 10
1 ________ ________ ________ _____
2 ____________ ____________ ____________
_______
3 ____________ ____________ ____________
_______
4 ____________ ____________ ____________
_______
5 ____________ ____________ ____________
_______
6 ____________ ____________ ____________
_______
7 ____________ ____________ ____________
_______
8 ____________ ____________ ____________
_______
9 ____________ ____________ ____________
_______
10 ____________ ____________ ____________
_______
17
Total Costs
900
Cost
800
700
600
Total Cost
500
400
Total Variable Cost
300
200
Total Fixed Cost
100
0
6
7
8
9
10
3
4
5
1
2
Output
18
90
80
Cost
70
ATC
60
50
and
40
MC
30
20
Graphed
AVC
10
AFC
0
6
7
8
9
10
3
4
5
1
2
Output
19
Long-Run Average Total Cost
Gets more efficient as size increases
Gets less efficient as size increases
Efficient Range of Production
LRAC
600,000
Diseconomies of Scale
Economies of Scale
500,000
400,000
300,000
200,000
Constant Returns to Scale
100,000
0
6
7
8
9
10
3
4
5
1
2
Houses Built
20
Long Run Costs
Economies of Scale
More efficient as size increases
Diseconomies of Scale
Less efficient as size increases
Constant Returns to Scale
Efficient Range of Production
21
The Production Function
The recipe going from inputs to outputs
Efficient Production
The least cost combination of inputs.
It varies by firm
22
The Law of Diminishing Returns
In the beginning, output increases with each unit
added, but at some point output will begin to
decrease with each additional unit of a resource.
Like Labor
ATC curve goes down as efficiency increases
Then begins to go up
23
The Production Function Output
Data Output
Labor Total Marginal Average
0 0
___
3
___
3
1 3
___
5
___
4
2 8
___
4
___
4
3 12
___
3
3.75
___
4 15
2
___
___
3.4
5 17
___
1
___
3
6 18
24
The Production Function Output
Total Output
Output
18
15
12
9
6
3
0
1
2
3
4
5
6
Quantity of Labor
25
The Production Function Output
Average and Marginal
Output
6
5
4
3
2
1
0
1
2
3
4
5
6
Quantity of Labor
26
20 Questions
27

• Which of the following is most likely to be an
  implicit cost of production?
• property taxes on a building owned by the firm
• transportation costs paid to a trucking supplier
• c. rental payments for a building utilized by
  the company and rented from another party
• d. interest income foregone on funds invested in
  the firm by the owners

2. The law of diminishing returns a. explains why
marginal cost eventually increases as output
expands. b. implies that average fixed cost will
remain unchanged as output expands. c. is true
for physical production activities but not for
activities such as studying. d. applies to a
capitalist economy but would be irrelevant if the
means of production were owned by the state.
3. Which of the following represents a long-run
adjustment? a. the hiring of four additional
cashiers by a supermarket b. a cutback on
purchases of coke and iron ore by a steel
manufacturer c. construction of a new
assembly-line plant by a car manufacturer d. the
extra dose of fertilizer used by a farmer on his
wheat crop
28
4. The short-run average total cost (ATC) curve
of a firm is U-shaped because a. larger firms
always have lower per-unit costs than smaller
firms. b. at low levels of output, AFC will be
high, while at high levels of output, MC will be
high as the result of diminishing
returns. c. diminishing returns will be present
when output is small, and high AFC will push
per-unit cost to high levels when output is
large. d. diseconomies of scale will be present
at both small and large output rates.
5. When costs that vary with the level of output
are divided by the output, you have
calculated a. total changing cost.
b. total fixed cost. c. average fixed cost.
d. average variable cost.
6. A downward-sloping portion of a LR average
total cost curve is the result of a. economies
of scale. b. diseconomies of
scale. c. diminishing returns.
d. the existence of fixed resources.
7. In the short run, if average variable cost
equals 50, average total cost equals 75, and
output equals 100, the total fixed cost must be
a. 25. b. 2,500.
c. 5,000. d. 7,500.
29

• At what output in the graph would the firms
  per-unit cost of production be minimized?
• 3 b. 4 c. 5
  d. 6

b. 4

• What is the firms approximate total cost when it
  produces three units?
• 10 b. 16 c. 48
  d. 60

c. 48

• What is the firms total cost when it produces
  four units?
• 11 b. 15 c.
  60 d. 75

c. 60
The average variable cost and average total cost
for a firm are indicated in the graph. If the
marginal cost curve were constructed, at what
output would it cross the AVC curve?
b. 15

• 10 b. 15 c. 20 d.
  25

At what output should a the marginal cost curve
cross the ATC curve?

• 15 b. 20 c.
  25 d. 30

b. 20