Test corrections

• Get out a sheet of paper for test

corrections! (keep in it notebook)
• 1 skinny column, 1 big column
• Question # and correct answer on left,
explanation of correct answer on right
 3-2 Costs of
Production in the
short run

2
 Implicit vs. explicit costs
• How much does it cost to go to college?
 Accountants vs. Economists
Accountants look at only EXPLICIT COSTS
•Explicit costs (out of pocket costs) are payments
paid by firms for using the resources of others.
•Example: Rent, Wages, Materials, Electricity Bills
Accounting Total
Profit Accounting Costs
Revenue (Explicit Only)
Economists examine both the EXPLICIT COSTS and
the IMPLICIT COSTS
•Implicit costs are the opportunity costs that firms
“pay” for using their own resources
•Example: Forgone Wage, Forgone Rent, Time
Economic Total
Economic Costs
Profit Revenue 7
(Explicit + Implicit)
 Accountants vs. Economists
Accountants look at only EXPLICIT COSTS
•Explicit costs (out of pocket costs) are payments
paid by firms for using the resources of others.
•Example: Rent, Wages, Materials, Electricity Bills
Accounting Total
From
Profit now on,
Revenue
allAccounting
costs Costs
(Explicit Only)
are automatically
Economists examine both the EXPLICIT COSTS and
ECONOMIC
the IMPLICIT COSTS COSTS
•Implicit costs are the opportunity costs that firms
“pay” for using their own resources
•Example: Forgone Wage, Forgone Rent, Time
Economic Total
Economic Costs
Profit Revenue 8
(Explicit + Implicit)
Short-Run
Production
Costs
9
 Definition of the “Short-
Run”
• We will look at both short-run and long-
run production costs.
• Short-run is NOT a set specific amount of
time.
• The short-run is a period in which at least
one resource is fixed.
– Plant capacity/size is NOT changeable
• In the long-run ALL resources are variable
– NO fixed resources
– Plant capacity/size is changeable
Today we will examine Short-run costs.
10
 Different Economic Costs
Total Costs
FC = Total Fixed Costs
VC = Total Variable Costs
TC = Total Costs
Per Unit Costs
AFC = Average Fixed Costs
AVC = Average Variable Costs
ATC = Average Total Costs
MC = Marginal Cost 11
 Definitions
Fixed Costs:
Costs for fixed resources that DON’T change
with the amount produced
Ex: Rent, Insurance, Managers Salaries, etc.
Average Fixed Costs = Fixed Costs
Quantity
Variable Costs:
Costs for variable resources that DO change as
more or less is produced
Ex: Raw Materials, Labor, Electricity, etc.
Variable Costs
Average Variable Costs =
Quantity 12
 Definitions
Total Cost:
Sum of Fixed and Variable Costs

Average Total Cost = Total Costs

Quantity
Marginal Cost:
Additional costs of an additional output.
Ex: If the production of two more output
increases total cost from $100 to $120, the MC
$10
is _____.
Change in Total Costs
Marginal Cost =
Change in Quantity 13
 Review
1. Explain what fixed costs are and give an example
2. Explain what variable costs are and give an example
3. Explain the law of diminishing marginal returns
4. What are the 3 stages of returns?
5. Why does marginal product increase in the first stage?
6. Why does marginal product begin to fall and at some point
go negative?
7. What is the only way to get around the law?
8. What is AFC, AVC, and ATC?
9. How much would someone have to pay you to eat a steamy
pile of human poo?
 Calculating TC, VC, FC, ATC, AFC, and MC
Average Average Average
Total Fixed Variable Total Marginal Fixed Variabe Total
Product Cost Cost Cost Cost Cost Cost Cost
0 100 0.0 100
1 100 10.0 110 10 100 10 110
2 100 16.0 116 6 50 8 58
3 100 21.0
4 100 26.0
5 100 30.0
6 100 36.0
7 100 45.5
8 100 56.0
9 100 72.0
10 100 90.0
11 100 109.0
12 100 130.0
13 100 160.0
15
Draw this in your notes
 Calculating TC, VC, FC, ATC, AFC,
and MC Average Average Average
Total Fixed Variable Total Marginal Fixed Variabe Total
Product Cost Cost Cost Cost Cost Cost Cost
0 100 0.0 100
1 100 10.0 110 10 100 10 110
2 100 16.0 116 6 50 8 58
3 100 21.0 121
4 100 26.0 126
5 100 30.0 130
6 100 36.0 136
7 100 45.5 145.5
8 100 56.0 156
9 100 72.0 172
10 100 90.0 190
11 100 109.0 209
12 100 130.0 230
13 100 160.0 260
16
 TOTAL COSTS GRAPHICALLY
Combining VC TC
With FC to get
800 VC
Total Cost
700 Fixed Cost
Costs (dollars)

600
500 • Different
Numbers
400
• Don’t
300 draw in
200 notes
100 FC
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity
17
 TOTAL COSTS GRAPHICALLY
Combining VC TC
With FC to get
800 VC
Total Cost
700 Fixed Cost
Costs (dollars)

600
500 What is the
400
TOTAL COST,
FC, and VC for
300
producing 9 units?
200
100 FC
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity
18
 Marginal Cost Average Average Average
Total Fixed Variable Total Marginal Fixed Variabe Total
Product Cost Cost Cost Cost Cost Cost Cost
0 100 0.0 100
1 100 10.0 110 10 100 10 110
2 100 16.0 116 6 50 8 58
3 100 21.0 121
4 100 26.0 126
5 100 30.0 130
6 100 36.0 136
7 100 45.5 145.5
8 100 56.0 156
9 100 72.0 172
10 100 90.0 190
11 100 109.0 209
12 100 130.0 230
19
13 100 160.0 260
 Marginal Cost Average Average Average
Total Fixed Variable Total Marginal Fixed Variabe Total
Product Cost Cost Cost Cost Cost Cost Cost
0 100 0.0 100
1 100 10.0 110 10.0 100 10 110
2 100 16.0 116 6.0 50 8 58
3 100 21.0 121 5.0
4 100 26.0 126 5.0
5 100 30.0 130 4.0
6 100 36.0 136 6.0
7 100 45.5 145.5 9.5
8 100 56.0 156 10.5
9 100 72.0 172 16.0
10 100 90.0 190 18.0
11 100 109.0 209 19.0
12 100 130.0 230 21.0
20
13 100 160.0 260 30.0
 Why is the MC curve U-shaped?

MC
30

25
Costs (dollars)

20

15

10

5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity 21
Marginal Product Relationship between Production and Cost

Why is the MC curve U-

shaped?
•When marginal product is
MP
increasing, marginal cost falls.
Quantity of labor
•When marginal product falls,
MC marginal costs increase.
Costs

MP and MC are mirror images

of each other.

Quantity of output 22
 Per Unit Costs Average Average Average
Total Fixed Variable Total Marginal Fixed Variabe Total
Product Cost Cost Cost Cost Cost Cost Cost
0 100 0.0 100
1 100 10.0 110 10 100 10 110
2 100 16.0 116 6 50 8 58
3 100 21.0 121
4 100 26.0 126
5 100 30.0 130
6 100 36.0 136
7 100 45.5 145.5
8 100 56.0 156
9 100 72.0 172
10 100 90.0 190
11 100 109.0 209
12 100 130.0 230
23
13 100 160.0 260
 Per Unit Costs Average Average Average
Total Fixed Variable Total Marginal Fixed Variabe Total
Product Cost Cost Cost Cost Cost Cost Cost
0 100 0.0 100
1 100 10.0 110 10.00 100.00 10.00 110.00
2 100 16.0 116 6.00 50.00 8.00 58.00
3 100 21.0 121 5.00 33.33 7.00 40.33
4 100 26.0 126 5.00 25.00 6.50 31.50
5 100 30.0 130 4.00 20.00 6.00 26.00
6 100 36.0 136 6.00 16.67 6.00 22.67
7 100 45.5 145.5 9.50 14.29 6.50 20.79
8 100 56.0 156 10.50 12.50 7.00 19.50
9 100 72.0 172 16.00 11.11 8.00 19.11
10 100 90.0 190 18.00 10.00 9.00 19.00
11 100 109.0 209 19.00 9.09 9.90 19.00
12 100 130.0 230 21.00 8.33 10.83 19.16
24
13 100 160.0 260 30.00 7.69 12.31 20.00
Aver
m RelationshipMP between Production and Cost
Quantity of labor Why is the ATC curve U-
MC shaped?
Costs (dollars)

•When the marginal cost is

below the average, it pulls
ATC the average down.
•When the marginal cost is
above the average, it pulls
Quantity of output
the average up.
The MC curve intersects the ATC curve at its lowest point.
Example:
•The average income in the room is $50,000.
•An additional (marginal) person enters the room: Bill Gates.
•If the marginal is greater than the average it pulls it up.
•Notice that MC can increase but still pull down the average.
25
 review
• Explain the law of diminishing marginal returns
• Give a real life example of the law of DMR
• What are fixed costs?
• What are variable costs?
• What is the definition of the short run?
• What are costs like in the long run?
• Describe the equatios for AVC, AFC, ATC
• Describe the 3 phases of diminishing marginal returns
• What is the definition of marginal cost
• Define elasticity
• What are the coefficients of inelastic and elastic demand?
• Name 10 countries in africa
 Happy

Halloween!
 Per-Unit Costs (Average and Marginal)
MC
12
11
10 ATC
9
AVC
Costs (dollars)

8
7
6 How much does
5
4
the 11th unit costs?
3
2
1 AFC
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity
28
 Per-Unit Costs (Average and Marginal)
MC ATC and AVC get
closer and closer but
12 NEVER touch
11
10 ATC
9
AVC
Costs (dollars)

8
7
6
5 Average Fixed
4 Cost
3
2
1 AFC
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity
29
Per-Unit Costs (Average and Marginal)

At output Q, what
area represents:
TC 0CDQ
VC 0BEQ
FC 0AFQ or BCDE

30