Production and Costs II

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ProductionandCosts - II

• Microeconomics - Dr. D. Foster

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Costs

• All costs are opportunity costs.
• Costs may be explicit or implicit.
• Total cost TC all relevant costs.
• (Economic) Profit TR-TC
• If positive, firms will enter.
• If negative, firms will exit.
• If zero, the market is stable.
• Accounting profit may/will not equal Economic
  Profit.

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Costs

• We are interested in the short run At
  least one input is fixed
• Fixed - capital variable - labor
• TC Total Fixed Cost (TFC) Total
  Variable Cost (TVC)
• As production rises, TFC is constant (!)
• As production rises, TVC rises.
• As production rises, ?TVC ?TC

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Production Relationships

• From 0 to L1 there are increasing returns.
• From L1 onwards, there are diminishing marginal
  returns.
• After L2 additional workers lower output. Why?

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Production Relationships

• Marginal Product MP ?TP/?Lthis shows how
  much the last worker (unit) adds to output.

• Average Product AP TP/Lthis shows how much
  the average worker adds to output.

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Cost Relationships

• Marginal Cost MC ?TC/?Qthis shows how much
  each additional unit costswhere MP is at a
  maximum, MC is at a minimum (L1, Q1)

• Average Variable Cost AVC TVC/Qthis shows
  what the variable cost is for each unit, on
  averagewhere AP is at a maximum, ATC is at a
  minimum (L2, Q2)

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Cost Relationships

• As noted, TC TFC TVC
• TVC wL, where w is the wage rate.
• Average Fixed Costs, AFC TFC/Q
• Average Variable Costs, AVC TVC/Q . . . or,
  wL/Q w/AP
• Average Total Cost, ATC AFC AVC. . . or,
  TC/Q
• Marginal Cost, MC ?TC/?Q ?TVC/?Q (Why?). .
  . or, ?(wL)/?Q w(?L)/?Q w/MP

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Cost Relationships

Do the worksheets on Production and Cost.
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ProductionandCosts - II

• Microeconomics - Dr. D. Foster