1 / 23

Short-run costs and output decisions

8. Short-run costs and output decisions. CHAPTER. Short-Run Cost. Total cost (TC) is the cost of all productive resources used by a firm. Total fixed cost (TFC) is the cost of all the firm’s fixed inputs. Total variable cost (TVC) is the cost of all the firm’s variable inputs.

alessa
Download Presentation

Short-run costs and output decisions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 8 Short-run costs and output decisions CHAPTER

  2. Short-Run Cost • Total cost (TC) is the cost of all productive resources used by a firm. • Total fixed cost (TFC) is the cost of all the firm’s fixed inputs. • Total variable cost (TVC) is the cost of all the firm’s variable inputs. • Total cost (TC) is the cost of all productive resources used by a firm. • TC = TFC + TVC

  3. Total Cost Curves • Total Total • fixed variable Total • cost cost cost • Labor Output (TFC) (TVC) (TC) • (workers (sweaters • per day) per day) (dollars per day) • a 0 0 • b 1 4 • c 2 10 • d 3 13 • e 4 15 • f 5 16

  4. Total Cost Curves • Total Total • fixed variable Total • cost cost cost • Labor Output (TFC) (TVC) (TC) • (workers (sweaters • per day) per day) (dollars per day) • a 0 0 25 • b 1 4 25 • c 2 10 25 • d 3 13 25 • e 4 15 25 • f 5 16 25

  5. Total Cost Curves Total Total fixed variable Total cost cost cost Labor Output (TFC) (TVC) (TC) (workers (sweaters per day) per day) (dollars per day) a 0 0 25 0 b 1 4 25 25 c 2 10 25 50 d 3 13 25 75 e 4 15 25 100 f 5 16 25 125

  6. Total Cost Curves • Total Total • fixed variable Total • cost cost cost • Labor Output (TFC) (TVC) (TC) • (workers (sweaters • per day) per day) (dollars per day) • a 0 0 25 0 25 • b 1 4 25 25 50 • c 2 10 25 50 75 • d 3 13 25 75 100 • e 4 15 25 100 125 • f 5 16 25 125 150

  7. TC TVC TFC Total Cost Curves • TCC TC = TFC + TVC 150 Cost (dollars per day) 100 50 0 5 10 15 Output (sweaters per day)

  8. Marginal Cost • Marginal cost is the increase in total cost that results from a one-unit increase in output. • It equals the increase in total cost divided by the increase in output. • Marginal costs decrease at low outputs because of the gains from specialization, but it eventually increases due to the law of diminishing returns.

  9. Average Cost • Average fixed cost (AFC) is total fixed cost per unit of output. • Average variable cost (AVC) is total variable cost per unit of output. • Average total cost (ATC) is total cost per unit of output.

  10. TC TFC TVC = + Q Q Q Average Cost • AC TC = TFC + TVC OR ATC = AFC + AVC

  11. MC ATC AVC AFC Marginal Cost and Average Costs ATC = AFC + AVC 15 • MC Cost (dollars per sweater) 10 5 0 5 10 15

  12. Economic Profit and Revenue • Total revenueis the value of a firm’s sales. • Total revenue = P  Q • Marginal revenue(MR) • Change in total revenue resulting from a one-unit increase in quantity sold. • Average revenue(AR) • Total revenue divided by the quantity sold—revenue per unit sold. • In perfect competition, Price = MR = AR

  13. TC Economic loss Economic profit = TR - TC Economic loss Total Revenue, Total Cost, and Economic Profit • TR, TC TR 300 Total revenue & total cost (dollars per day) 225 183 100 0 4 9 12 Quantity (sweaters per day)

  14. Economic profit Economic loss Profit maximizing quantity Total Revenue, Total Cost, and Economic Profit • EP Economic profit/loss 42 Profit/loss (dollars per day) 20 0 Quantity (sweaters per day) 4 9 12 -20 Profit/ loss -40

  15. Marginal Analysis • If MR > MC, the extra revenue from selling one more unit exceeds the extra cost. • The firm should increase output to increase profit. • If MR < MC, the extra revenue from selling one more unit is less than the extra cost. • The firm should decrease output to increase profit. • If MR = MC economic profit is maximized

  16. Profit- maximization point MC Loss from 10th sweater MR Profit from 9th sweater Profit-Maximizing Output • MA 30 25 Marginal revenue & marginal cost (dollars per day) 20 10 0 8 9 10 Quantity (sweaters per day)

  17. MC = S MR2 MR1 Shutdown point AVC s MR0 A Firm’s Supply Curve • SC 31 Marginal revenue & marginal cost (dollars per day) 25 17 0 7 9 10 Quantity (sweaters per day)

  18. S s A Firm’s Supply Curve • SC 31 Marginal revenue & marginal cost (dollars per day) 25 17 0 7 9 10

  19. The Firm’s Decisions in Perfect Competition • In the short-run, the firm must decide: • Whether to produce or to shut down. • If the decision is to produce, what quantity to produce.

  20. Break-even point AR = MR Three Possible Profit Outcomes in the Short-Run • NP Normal profit 30.00 MC ATC Price (dollars per chip) 25.00 20.00 15.00 0 8 10 Quantity (millions of chips per year)

  21. AR = MR Economic Profit Three Possible Profit Outcomes in the Short-Run • EP Economic profit 30.00 MC ATC Price (dollars per chip) 25.00 20.33 15.00 0 9 10 Quantity (millions of chips per year)

  22. Economic loss AR = MR Three Possible Profit Outcomes in the Short-Run • EL Economic loss 30.00 MC ATC 25.00 20.14 17.00 0 7 10 Quantity (millions of chips per year)

  23. THE END

More Related