lec 13 - cost production

The market forces of supply and demand

According to Law of Supply:
- When price of good is high, firms willing to produce and sell more quantity of good → supply curve slopes upward (pic)
The economic goal of a firm is to maximize profits.

A firm’s cost of production includes all the opportunity costs of making its output of goods and services.
A firm’s cost of production includes explicit costs and implicit costs
- Explicit Costs: Input costs that require a direct outlay of money by the firm.
  - Examples: Salaries, Rent, Taxes, etc.
- Implicit Costs: Input costs that do not require an outlay of money by the firm.
  - Examples: Opportunity costs, Unused capacity, owner’s time etc.

Economic Profit: Total Revenue - Total Cost (Explicit + Implicit Costs)
Accounting Profit: Total Revenue - Explicit Costs
When Total Revenue > (Explicit + Implicit Cost) = Firm earns economic profit (smaller than accounting profit)
here

Production Function: Shows the relationship between quantity of inputs used to make a good and the quantity of output of that good., pic1, pic2
Marginal Product: The increase in output that arises from an additional unit of input.
- eg. if a shoe factory produces 100 pairs of shoes with 5 workers, and then it produces 110 pairs when a 6th worker is added, the marginal product of labor is 10 pairs of shoes (110-100).
Diminishing Marginal Product: The property whereby the marginal product of an input declines as the quantity of the input increases.
- eg. As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.
- The slope of the production function represents the marginal product of an input, specifically in the eg, (110-100 / 1-0) = 10
- When the marginal product starts to decline (due to the law of diminishing marginal returns), the production function becomes flatter. This means that each additional worker is contributing less to the total output than the previous worker.

relationship btw the quantity can produce & its cost → pricing decision, illustrated graphically by the total-cost curve

Fixed Costs (FC): Costs that do not vary with the quantity of output produced.
- For example, the rent for a factory or the salary of permanent staff. These costs have to be paid whether the factory produces 100 units or 1000 units.
Variable Costs (VC): Costs that vary with the quantity of output produced.
- For example, the cost of raw materials or the wages of temporary workers. If you produce more units, you’ll need more raw materials and possibly more workers.
Total Costs (TC): Sum of total fixed costs (TFC) and total variable costs (TVC). ⇒ $TC = TFC + T V C$

Average Costs: Determined by dividing the firm’s costs by the quantity of output it produces.
Average Fixed Costs (AFC): $A FC = FC / Q$
Average Variable Costs (AVC): $A V C = V C / Q$
Average Total Costs (ATC): $A TC = TC / Q$
- U-shaped curve
  1. at low number of output, ATC is high, as fixed cost spread over only a few units
  2. decline as output increases
  3. start rising as AVC rises substantially
- efficient scale: bottom of u-shaped ATC curve, where the quantity minimizes ATC
graph of MC, AVC, AFC, ATC

Marginal Cost (MC): Measures the increase in total cost that arises from an extra unit of production. $MC = △ TC / △ Q$ (change in total cost / change in quantity)
- MC rises with the amount of output produced (reflect the diminishing marginal product)
whenever MC < ATC, ATC is falling, pic
whenever MC > ATC, ATC is rising, pic
MC = ATC at efficient scale, or minimum of ATC, pic

In the short run, some costs are fixed, while in the long run, fixed costs become variable costs. ⇒ division btw fixed costs and variable costs depend on the time frame being considered
A firm’s long-run cost curves differ from its short-run cost curves due to this distinction.
illustration

Economies of Scale: Property whereby long-run ATC falls as the quantity of output increases.
- For example, a car manufacturer may buy parts in bulk. The more cars they make, the cheaper each part becomes, reducing the overall cost of each car.
Diseconomies of Scale: Property whereby long-run ATC rises as the quantity of output increases.
- For example, a company might grow so large that it becomes inefficient. Communication may become difficult, leading to delays and increased costs.
Constant Returns to Scale: Property whereby long-run average total cost stays the same as the quantity of output increases.
- For example, a bakery might find that doubling the number of loaves of bread they bake doesn’t change the cost per loaf, because the cost of ingredients and the time to bake each loaf remains constant.
graph