Production and Cost Analysis Part II

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Production and Cost Analysis Part II

• Costs of Production
• Productivity and Costs

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Costs of Production

• Types of Costs
• Fixed Costs
• Variable Costs
• Total Costs
• Marginal Costs
• Average Costs

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(No Transcript)
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Total Cost The sum of total fixed costs and
total variable costs. Included in these costs is
not only the explicit costs (those paid to
outside suppliers of resources), but implicit
costs (the market value of all other resources
contributed by the owners of the firm).
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Total Cost The sum of total fixed costs and
total variable costs.
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Marginal Cost The change in total cost when
quantity is changed by one unit.
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Average Total Cost
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Average Fixed Cost
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Average Variable Cost
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Production and Cost Analysis Part II

• The Costs of Production
• Productivity and Costs

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Productivity and Costs
The Short Run and the Long Run
Refers to the degree of flexibility the firm has
in changing the level of output.
In the short run there is at least one resource
which is not flexible and this limits the
expansion of output.
Colander, Economics 2nd edition, pg. 520,
Irwing Publishing
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As Increasing quantities of a variable resource
are applied to a fixed resource of production,
the resulting additions to output will eventually
decrease.
The Law of Diminishing Marginal Returns
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of Workers
Total Product
Marginal Product ? Total Output
Average Product Total Output workers
1 2 3 4 5
4 8 13 20 21












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Marginal Cost Per Unit
of Workers
Marginal Cost
?TC ? TP
1 2 3 4 5
10/4 2.50 10/4 2.50 10/5
2.00 10/7 1.43 10/1 10.00









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Marginal Product
MC
MP
5.00 4.00 3.00 2.00 1.00
5 4 3 2 1
of Workers
0 2 4 6 8
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Marginal Cost
MC
MP
5.00 4.00 3.00 2.00 1.00
5 4 3 2 1
of Workers
0 2 4 6 8
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Marginal Cost and Marginal Product
MC
MP
5.00 4.00 3.00 2.00 1.00
5 4 3 2 1
of Workers
0 2 4 6 8
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Marginal Avg. Test Scores
Marginal Score
Average Score
80/1 80
80 70 65 90 95


150/2 75
215/3 71.67

305/4 76.25
400/5 80



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Marginal Avg. Cost Per Unit
Average Cost
10/4 2.50


20/8 2.50
30/13 2.31

40/20 2.00
50/21 2.38