Outline for Lecture 10
Economic Costs
How do we define economic costs? Provide an example.
Explicit and Implicit Costs
Economic costs can be explicit or implicit.
To make the distinction, consider following examplethat resembles, but is slightly different from, the one in textbook.
Suppose that you work as a sales rep for a company that sells picture frames and make $30,000. Over time, you develop skills in this line of work and grow confident that you can run your own business. The startup requires a one-time investment, an amount you pay from your savings, which used to earn interest income of $2,000. You rent space for $6,000 and hire office staff for $25,000. Finally, it costs $45,000 in labor, materials, and utilities to produce the frames and you earn total revenues of $170,000 from sales.
Explicit costs
How do we define explicit costs? In our example, what is the total amount of explicit costs?
Provide a breakdown of explicit cost items and explain why eachis considered explicit.
Accounting Profit
How do we define accounting profit? In our example, what is the amount of accounting profit?
Implicit costs
How do we define implicit costs? In our example, what is the total amount of implicit costs? In considering implicit costs, you may disregard normal profit (foregone entrepreneurial income).
Provide a breakdown of implicit cost items and explain why eachis considered implicit.
Economic Profit
How do we define economic profit? In our example, what is the amount of economic profit?
Compare economic profit to accounting profit. Which of the two is larger? Explain why.
Short Run and Long Run
In discussing costsof production, it helps to distinguish between short run and long run.
Short Run: Fixed Plant
How do we define short run?
Of main resource categories (i.e. labor, raw materials, plant, and physical capital), which are variable in the short run? Which are fixed in the short run?
Long Run: Variable Plant
How do we define long run?
Of main resource categories (i.e. labor, raw materials, plant, and physical capital), which are variable in the long run? Which are fixed in the long run?
Outline for Lecture 11
Short-Run Production Relationships
Referring to Lecture 10, how do we define short run?
Accordingly, although levels of ____ and ____ are fixed in the short run, a firm may raise or reduce short-run production by adjusting levels of ____ and ____.
For simplicity, we focus on labor resource and examine the impact of changes in number of workers on short-run output.
For a numerical exercise, suppose that output produced in the short run is 81 units with a labor supply of 9 workers. All else constant, when firm hires one more worker and expands labor supply to 10 workers, output produced rises to 100 units.
Total product (TP)
How do we define total product? In our example, what is total product for a labor supply of 9 workers? How about total product for a labor supply of 10 workers?
Average product (AP)
How do we define average product? What is average product for a labor supply of 9 workers? How about average product for a labor supply of 10 workers?
Marginal product (MP)
How do we define marginal product? What is the relationship between total product and marginal product? What is marginal product of the 10th worker?
Law of Diminishing Returns
Table 9.1 presents data on short-run productionfor a hypothetical firm: total product, average product, and marginal product at different levels of labor.
We see that,on the basis of fixed plant and capital, the firm may raise total product by adding laborin the short run. However, hiring more workers will not raise output indefinitely; there is a limit on total product imposed by the law of diminishing returns, which is graphically illustrated by the upper panel in Figure 9.2.
Law of diminishing returns states that as successive units of a ____ resource are added to a ____ resource, beyond some point marginal product of ____ resource ____.
What is the economic rationale behind law of diminishing returns? Explain.
Outline for Lecture 12
Short-Run Production Costs
Fixed, Variable, and Total Costs
Of main resource categories (i.e. labor, raw materials, plant, and physical capital), ____ and ____ are fixed whereas ____ and ____ are variable in the short run.
Therefore, short-run production costs may be fixed or variable depending on whether the firm is buying a fixed resource or a variable resource.
Fixed Costs
How do we define fixed costs? Do fixed costs depend on the level of output produced or do they have to do with the existence of a plant? Provide examples of typical fixed cost items.
Table 9.2 presents cost data for a hypothetical firm. In Column 2, we have total fixed cost.
What is total fixed cost for an output level of 0? How about an output of level of 1? Report total fixed cost for allremaining output levels. Looking across the second column, what type of trend do we see in total fixed cost?
Figure 9.3 illustrates cost data from Table 9.2 with ____ measured on horizontal axis and ____ measured on vertical axis.
What is the shape of total fixed cost (TFC)curve? Explain why.
Variable Costs
How do we define variable costs? Do variable costs depend on the level of output produced or do they have to do with the existence of a plant? Provide examples of typical variable cost items.
Column 3 of Table 9.2 reports total variable cost.
What is total variable cost for an output level of 0? How about an output of level of 1? Report total variable cost for all remaining output levels.Looking across the third column, what type of trend do we see in total variable cost?
In Figure 9.3, what is the shape of total variable cost (TVC) curve? Explain why.
Total Cost
How do we define total cost? What is therelationship between total cost, total fixed cost, and total variable cost?
Column 4 of Table 9.2 reports total cost.
What is total cost for an output level of 0? How about an output of level of 1? Report total cost for all remaining output levels. Looking across the fourth column, what type of trend do we see in total cost?
In Figure 9.3, what is the shape of total cost (TC)curve? Is TC similar to TVC? Explain why.
Outline for Lecture 13
Per-Unit, or Average, Costs
We study average, or per-unit, costs because average cost data are meaningful for ____.
Average Fixed Cost (AFC)
How do we define average fixed cost?
Table 9.2 presents cost data for a hypothetical firm. In Column 5, we have average fixed cost.
What is averagefixed cost for an output level of 1? How about an output of level of 2? Report average fixed cost for allremaining units. Looking across the fifth column, what type of trend do we see in average fixed cost?
Figure 9.4graphically illustrates the cost data from Table 9.2 with ____ measured on horizontal axis and ____ measured on vertical axis.
What is the shape of average fixed cost (AFC)curve? Explain why.
Average Variable Cost (AVC)
How do we define average variable cost?
Column 6 of Table 9.2 reportsaverage variable cost.
What is average variable cost for an output level of 1? How about an output of level of 2? Report average variable cost for all remaining units.Looking across the sixth column, what type of trend do we see inaverage variable cost?
In Figure 9.4, what is the shape of average variable cost (AVC) curve? Explain why. Your answer should be based on the law of diminishing returns from Lecture 11.
Average Total Cost (ATC)
How do we define average total cost?
Column 7 of Table 9.2 reports averagetotal cost.
What is averagetotal cost for an output level of 1? How about an output of level of 2? Report average total cost for all remainingunits.Looking across the seventh column, what type of trend do we see inaverage total cost?
In Figure 9.4, what is the shape of average total cost (ATC) curve? Explain why.
Outline for Lecture 14
Marginal Cost
How do we define marginal cost?
In Table 9.2, what is marginal cost for the first unit of output? How about the second unit? Report marginal cost for all remaining units. Looking across the eighth column, what type of trend do we see in marginal cost?
In Figure 9.5, what is the shape of marginal cost (MC) curve? Explain why. Your answer should be based on the law of diminishing returns from Lecture 11.
Relation of MC to AVC and ATC
There is an interesting relationship between marginal cost (MC) curve and two average cost curves, average variable cost (AVC) curve andaverage total cost (ATC) curve: MC intersects AVC and ATC at their respective minimum points.
For example, Figure 9.6(b) shows that MC crosses AVC at AVC's lowest point. Explain why.
Shifts of the Cost Curves
Two factors shift cost curves in the short run: resource prices andtechnology.
1. Resource prices
An increase in the price of fixed resources shifts ____ and ____ upward, whereas ____ and ____ remain unaffected.
Explain why with an example.
An increase in the price of variable resources shifts ____, ____, and ____ upward, whereas ____ remains unaffected.
Explain why with an example.
2. Technology
Discovery of a more efficient technology would ____ productivity of all resources, fixed and variable, and shift all short-run cost curves (AFC, AVC, ATC, and MC) ____.
Explain why with an example.
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