Professional Documents
Culture Documents
Production and
and Cost
Cost
Analysis:
Analysis: Part
Part II
Chapter 9
Introduction
• In the supply process, households first offer the
factors of production they control to the factor
market.
Economic profit =
0 0 4 — Increasing
1 4 6 4 marginal returns
2 10 5
3 7
17 6 5.7
4 23 5.8 Diminishing
5 marginal returns
5 28 3 5.6
6 31 1 5.2
7 32 0 4.6
8 32 2 4.0 Diminishing
9 30 3.3 absolute returns
5
10 25 2.5
A Production Function
18 4
16 marginal
14 returns
3
12
10
8 2
AP
6
4 1
2
0 0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Number of workers Number of workers MP
(a) Total product (b) Marginal and average product
The Law of Diminishing Marginal
Productivity
• Fixed Costs,
• Variable Costs, and
• Total Costs
Fixed Costs, Variable Costs, and
Total Costs
TC = FC + VC
Costs of Production:
Average Costs
ATC = TC/Q
Average Costs
AFC = FC/Q
Average Costs
AVC = VC/Q
Average Costs
TC = (VC + FC)
250
200 L
150
100 O
M
50 FC
0
2 4 6 8 10 20 30
Quantity of earrings
Average and Marginal Cost Curves
12 ATC
10 AVC
8
6
4
2 AFC
0 2 4 6 8 10 12 14 16 18 20 22 2426 28 30 32
Quantity of earrings
The Relationship Between
Productivity and Costs
12 AVC 6 A
10 5
8 4 AP of
6 3 workers
4 2
2 1 MP of workers
0 4 8 12 16 20 24 Output 0 4 8 12 16 20 24 Output
Relationship Between Marginal and
Average Costs
• To summarize:
If MC > ATC, then ATC is rising.
If MC = ATC, then ATC is at its low point.
If MC < ATC, then ATC is falling.
Relationship Between Marginal and
Average Costs
$90
ATC MC
80
70 Area A Area C
60 AVC Area B
Costs per unit
50 ATC
40 AVC
30 B
20
A
10 MC Q0 Q1
0
1 2 3 4 5 6 7 8 9
Quantity of output
Production
Production and
and Cost
Cost
Analysis:
Analysis: Part
Part II
End of Chapter 9