1 / 22

CH 5 - Cost Functions

CH 5 - Cost Functions. Costs are two kind: 1- Economic Cost = Explicit Costs + Implicit Costs Explicit cost : are out-of-pocket expenses, such as labor, raw materials , and rent.

csylva
Download Presentation

CH 5 - Cost Functions

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. CH 5 - Cost Functions Costs are two kind: 1- Economic Cost =Explicit Costs + Implicit Costs Explicit cost : are out-of-pocket expenses, such as labor, raw materials , and rent. Implicit costs : are foregone expenses, such as the value of your own time, and the value of your own money. 2- Acounting cost = Explicit Costs 1

  2. Economic versus Accounting Costs Economic profits ; equal total revenue minus economic costs (explicit and implicit). Accounting profits : equal total revenue minus accounting costs (explicit) . 2

  3. Example 1: If a firm’s total revenue is $80,000, and its explicit and implicit costs are $50,000 and $25,000, respectively, then its economic and accounting profits are: • $5,000; $25,000 • $5,000; $30,000 • $30,000; 5,000 • $30,000; $25,000 • $75,000; $80,000 3

  4. Calculations Economic Profit = $80,000 - $75,000 = $5,000 Accounting Profit = $80,000 - $50,000 = $30,000 4

  5. Example 2:If a firm’s total revenue is $80,000, and its explicit and implicit costs are $70,000 and $25,000, respectively, what are its economic and accounting profits? Economic Profit = $80,000 - $95,000 = - $15,000 Accounting Profit = $80,000 - $70,000 = $10,000 5

  6. Total Costs (TC) TC = Total Variable Cost + Total Fixed Cost = TVC + TFC Variable costs ; are costs that do vary with output like fuel, raw materials, and some labour costs. Fixed costs : are those that do not vary with output and typically include rents, insurance, depreciation 6

  7. Average Total Cost (ATC) Average total cost (ATC) is also called average cost (AC) or unit cost. AC = Average Variable Cost + Average Fixed Cost AC = AVC + AFC or AC = TC / Q AVC = TVC / Q AFC = TFC / Q 7

  8. Marginal Cost (MC) Marginal cost is the cost of producing one extra unit of output. MC = ∆TC / ∆Q 8

  9. Example 1 If TVC + TFC = TC, and TVC and TFC are $900 and $300, respectively, what is TC? Total Variable Cost $900 Total Fixed Cost $300 + + Total Cost $1200 9

  10. Continue example 1 If TC is $1,200 and production is 50, what is ATC? ATC = TC $1200 $24 = = Q 50 10

  11. If production is 50, and total variable and total fixed cost are $900 and $300, respectively, what are average variable cost and average fixed cost? (Output = 50). Average variable cost = Average fixed cost = $900 =$18 50 $300 =$6 50 11

  12. Using the data in the previous examples, let’s say that you produce an additional 5 products, and your total cost rises to $1260, what is your marginal cost? Marginal cost = change in total cost $60 = = $12 change in production 5 12

  13. Fill in the missing values 13

  14. answer 14

  15. The Shape of Typical Cost Curves Costsin Dollars MC ATC AVC Quantity Produced 15

  16. CH 5 - Cost Functions • The Long-run Average Cost CurveIn the long run, all inputs are variable. A firm has enough time to choose the size of its factory, farm, office building, or other capital goods.The firm can choose from many short-run cost curves. The bottom points of the short-run average cost curves make up the long-run average cost curve. 16

  17. CH 5 - Cost Functions • The Long-run Average Cost Curve Long-run average costs fall as production first rises. This is called economies of scale (EOS). When the firm gets too big, long-run average costs rise. This is called diseconomies of scale (DOS). Average Costs EOS DOS Quantity Produced 17

  18. CH 5 - Cost Functions • Returns to Scale When inputs increase, and production more than proportionately increases, then we speak of increasing returns to scale (associated with economies of scale). ExampleInputs increase by 10%, and production increases by 20%. 18

  19. CH 5 - Cost Functions • Returns to Scale When inputs increase, and production less than proportionately increases, then we speak of decreasing returns to scale (associated with diseconomies of scale). ExampleInputs increase by 10%, and production increases by 5%. 19

  20. CH 5 - Cost Functions • Returns to Scale When inputs increase, and production increases by the same percentage, then we speak of constant returns to scale. ExampleInputs increase by 10%, and production increases by 10%. 20

  21. If : • Total Revenue = 900,000 • Explicit cost = 450,000 • Implicit cost = 250,000 Calculate the economic and accounting profit. 21

  22. If is the variable factor of production labor only and the wage of one labor = 300 s.r. ,Continue this table22

More Related