Microeconomics Chapter 9: Business and Costs of Production

Payment that must be made to obtain and retain services of a resource. Income firm must provide to resource suppliers to attract resources away from alternative users

Monetary payments firm makes from those whom it must purchase resources that it does not own. Involves cash transactions. Every monetary payment involves forgoing best alternatives that could have been purchased

Opp. costs of using resources that is already owns to make firm's own product rather than selling resources to outsiders.

Profit # accountants calculate by subtracting total explicit costs from total revenue "net income"

The typical or "normal" amount of accounting profit that you would have earned in one of other ventures

The result of subtracting all of your economic costs (both explicit and implicit) from revenue. Can determine how current business venture companies with best alternative business venture. Allocation efficiency increases as firms led by profit signals

Period too brief for firm to alter plant capacity, yet long enough to permit change in degree to which plans current capacity is used. Can vary output with labor, etc.

Period long enough for firm to adjust quantities of all resources it employs, incl. plant capacity. Leaves time for existing firms to leave and new ones to enter.

Are conceptual periods, not time.

Cost of producing specific output depend on both prices and quantities of resources needed to produce output

Total quantity or total output of particular good or service produced

Extra output or added product associated with adding unit of variable resource (labor) to production process.

MP= Change in total product/change in labor input

Output of labor productivity per unit of labor input

AP= total product/units of labor

Assumes technology is fixed and techniques of production do not change. As successive units of variable resources are added to fixed resource, beyond some point the extra or marginal unit will decline.

Assumes all units of labor are of equal quality. Increase in workers, more successful with specialization.

Rises initially at increasing rate, increases then reaches a max and declines. MP measures change in total product associated with each succeeding unit of labor.

Total Product increase, MP rising. Extra units of labor adding more and more amnts of total product. But, when total product increases at decreasing rate, MP is pos. but falling. When TP is at max, MP becomes negative.

Costs that do not vary with changes in output. Are associated with the existence of firm's plants and must be paid even if its output is zero

Rental Payments, etc.

Costs that change with level of output. Includes payments for material, fuel, power, transportation services. Total of VC changes with output. MP increases so smaller increases in amounts of variables are needed.

Sum of fixed cost and variable cost at each level of output

Added vertically to Total Variable Cost. Fixed costs are beyond manager's current control

TFC+TVC

AFC= TFC/Q (output)

b/c TFC is same regardless of output, AFC must decline as output increases. As output rises, TFC spread over larger output- "spreading the overhead"

= TVC/Q

Due to increasing and diminishing returns, AVC declines initially, reaches a minimuum and then increases again. Fewer variable resources needed to produce each unit of output. Production very inefficient at low levels of output. As expands, greater specialization is better use of firm's capital equipment- AVC increases.

Extra or additional cost of producing one or more unit of output. Change in costs when one more or one less of unit of output is produced.

= Change in TC/ Change in Q

=Change in TC= change in TVC of each additional unit

Designates cost saved by not producing last unit. Firm's decisions as to what output level to produce.

Declines sharply, reaches a minimum then rises abruptly.

MC Curve's shape is consequence of law of diminishing returns. If all units of VC are hired at same price, MC of extra unit of output will fall

MC= constant cost of extra worker/ his/her marginal product

MC intersets both the AVC and ATC curves at respective minimum points. If av. of 3rd is higher, AC greater. When MC + total cost less than current AC, ATC falls

changes in either resource price or technology will cauuse costs to change and cost curves to shift. If fixed costs double, AFC curve shifts up

Can change amounts of all inputs used. Industry can also change overall capacity. Long time allows new firms to enter.

plant begins small and expands. ATC for time will reduce cost. Eventually, building of plant will cause ATC to rise.

The vertical lines perpendicular to output axis indicates outputs which firm should change plant size to realize lowest attainable average costs of production. Made up of short run ATC curves for various plant sizes.

Shows lowest ATC at which any output level can be produced after firm has made adjustments. Planning curve is smooth

Economies of mass production

1. Labor Specialization- hiring more jobs for division of labor
2. Managerial Specialization-large-scale production means better use of management
3. Efficient Capital- in many productions, machinery available only in large and expensive units
4. Other Factors- start up costs decline, firm learns by doing

higher average total cost. Main factor is difficulty of efficiently controlling and coordinating firm's operations as it becomes large-scale producers. As firm grows, authority is delegated which leads to communication problems

Wide range of output exists b/w output at which economies at scale end and diseconomies begin

Lowest level of output at which firm can minimize long-run average costs.

Given consumer demand, efficient producers achieved with few large scale producers might result in monopoly