Reviewing Production

1. Reviewing Production

2. Three Stages of Returns Stage I: Increasing Marginal Returns MP rising. TP increasing at an increasing rate. Why? Specialization. Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 2 Marginal Product

3. Three Stages of Returns Stage II: Decreasing Marginal Returns MP Falling. TP increasing at a decreasing rate. Why? Fixed Resources. Each worker adds less and less. Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 3 Marginal Product

4. Three Stages of Returns Stage III: Negative Marginal Returns MP is negative. TP decreasing. Workers get in each others way Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor Marginal Product

5. The Law of Diminishing Marginal Returns is NOT the results of laziness, it is the result of limited fixed resources.

6. Identify the three stages of returns

7. Accountants vs. Economists Economic Profit Accounting Profit Total Revenue Total Revenue Accounting Costs (Explicit Only) Economic Costs (Explicit + Implicit) • 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 • 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

8. Accountants vs. Economists Economic Profit Accounting Profit Total Revenue Total Revenue Accounting Costs (Explicit Only) Economic Costs (Explicit + Implicit) • 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 From now on, all “costs” are automatically ECONOMIC COSTS • 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

9. 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

10. Fixed Costs Average Fixed Costs = Quantity Variable Costs Average Variable Costs = Quantity Definitions Fixed Costs: Costs for fixed resources that DON’T change with the amount produced Ex: Rent, Insurance, Managers Salaries, etc. Variable Costs: Costs for variable resources that DO change as more or less is produced Ex: Raw Materials, Labor, Electricity, etc.

11. Total Costs Average Total Cost = Quantity Change in Total Costs Marginal Cost = Change in Quantity Definitions Total Cost: Sum of Fixed and Variable Costs 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 is _____. $10

12. TOTAL COSTS GRAPHICALLY Combining VC With FC to get Total Cost TC VC 800 700 600 500 400 300 200 100 0 Fixed Cost What is the TOTAL COST, FC, and VC for producing 9 units? Costs (dollars) FC Quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

13. Per Unit Costs

14. Per-Unit Costs (Average and Marginal) MC 12 11 10 9 8 7 6 5 4 3 2 1 ATC AVC How much does the 11th unit costs? Costs (dollars) AFC 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity

15. Per-Unit Costs (Average and Marginal) ATC and AVC get closer and closer but NEVER touch MC 12 11 10 9 8 7 6 5 4 3 2 1 ATC AVC Costs (dollars) Average Fixed Cost AFC 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity

16. Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC 0CDQ 0BEQ 0AFQ or BCDE

17. Why is the MC curve U-shaped? 12 11 10 9 8 7 6 5 4 3 2 1 MC Costs (dollars) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Quantity

18. Marginal Product Quantity of labor Costs Quantity of output Relationship between Production and Cost • Why is the MC curve U-shaped? • When marginal product is increasing, marginal cost falls. • When marginal product falls, marginal costs increase. • MP and MC are mirror images of each other. MP MC

19. Why is the MC curve U-shaped? • The MC curve falls and then rises because of diminishing marginal returns. • Example: • Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker ($10)

20. Why is the MC curve U-shaped? • The MC curve falls and then rises because of diminishing marginal returns. • Example: • Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker ($10)

21. Why is the MC curve U-shaped? • The MC curve falls and then rises because of diminishing marginal returns. • Example: • Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10)

22. Why is the MC curve U-shaped? • The MC curve falls and then rises because of diminishing marginal returns. • Example: • Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker ($10)

23. Why is the MC curve U-shaped? • The additional cost of the first 13 units produced falls because workers have increasing marginal returns. • As production continues, each worker adds less and less to production so the marginal cost for each unit increases.

24. AP Average product and marginal product Quantity of labor Costs (dollars) Quantity of output Relationship between Production and Cost MP • Why is the ATC curve U-shaped? • When the marginal cost is below the average, it pulls the average down. • When the marginal cost is above the average, it pulls the average up. MC ATC 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. Shifting Cost Curves

26. Shifting Costs Curves What if Fixed Costs increase to $200

27. Shifting Costs Curves

28. Shifting Costs Curves

29. Shifting Costs Curves Which Per Unit Cost Curves Change?

30. Shifting Costs Curves ONLY AFC and ATC Increase!

31. Shifting Costs Curves ONLY AFC and ATC Increase!

32. Shifting Costs Curves If fixed costs change ONLY AFC and ATC Change! MC and AVC DON’T change!

33. Shift from an increase in a Fixed Cost MC ATC1 ATC AVC Costs (dollars) AFC1 AFC Quantity

34. Shift from an increase in a Fixed Cost MC ATC1 AVC Costs (dollars) AFC1 Quantity

35. Shifting Costs Curves What if the cost for variable resources increase

36. Shifting Costs Curves

37. Shifting Costs Curves

38. Shifting Costs Curves Which Per Unit Cost Curves Change?

39. Shifting Costs Curves MC, AVC, and ATC Change!

40. Shifting Costs Curves MC, AVC, and ATC Change!

41. Shifting Costs Curves If variable costs change MC, AVC, and ATC Change!

42. Shift from an increase in a Variable Costs MC1 MC ATC1 AVC1 ATC AVC Costs (dollars) AFC Quantity

43. Shift from an increase in a Variable Costs MC1 ATC1 AVC1 Costs (dollars) AFC Quantity

45. 4 Market Structures Candy Markets Simulation

46. FOUR MARKET STRUCTURES Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly • Every product is sold in a market that can be considered one of the above market structures. • For example: • Market for restaurants in Lancaster area • Market for American Cars • Market for oil in 1900 • Market for Strawberries • Market for Cereal

47. Perfect Competition

48. FOUR MARKET STRUCTURES Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly Imperfect Competition Characteristics of Perfect Competition: Examples of Perfect Competition: Avocado farmers, sunglass huts, and hammocks in Mexico • Many small firms • Identical products (perfect substitutes) • No Control over Price (“Price Takers”) • Easy for firms to enter and exit the industry • Symmetric (same) information • Firms in ANY market structure will choose to profit maximize

49. Law of One Price In an efficient, perfectly competitive market, all identical goods must have only one price. Result: Each firm is a price taker. Firms have no control of the price Traffic Analogy When there is heavy traffic, why do all lanes seem to go the same speed? Cars leave slower lanes and enter faster lanes. Similarly, what happens in perfectly competitive markets if firms earn excessive profit? 49