07_Producer1_ - Firms Basic Producer Theory(Costs...

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1 Firms: Basic Producer Theory (Costs & Production: ½ the Story) (Section 7) I. Two types of profits Explicit Costs - Money actually paid out for the use of inputs (resources) Implicit Costs - The cost of inputs for which there is no direct money payment Ex - You own a restaurant, and also happen to own the building (does this mean the building is free?) Accounting profit = Total revenue – Explicit costs Economic profit = Total revenue – Total cost of production (Explicit costs + implicit costs) Ex - You own a firm that produces T-shirts Total Revenue from Selling T-shirts $300,000 Cost of raw materials $80,000 Wages and salaries $150,000 Electricity and phone $20,000 Advertising cost $40,000 Total Explicit Cost Accounting Profit Investment income foregone $6,000 Rent foregone $4,000 Salary foregone $40,000 Total Implicit Costs Total Costs Economic Profit
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2 II. Time periods Short Run (in production)- A time horizon during which at least one of the firm’s inputs cannot be changed (usually capital, K) Long Run (in production)- A time horizon long enough to vary all of its inputs Fixed Inputs - cannot change with a given time frame (usually capital, K) Variable Inputs - can change within any time frame (usually labor, L) III. Types of costs Total Fixed Costs (TFC)- Cost of all inputs that are fixed in short run. Ex - Average Fixed Costs (AFC)- Produced Output of Quantity Costs Fixed Total Total Variable Cost (TVC)- Cost of all variable inputs used in producing a particular level of output Average variable cost (AVC)- Output cost Variable Total Marginal Cost -
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3 Q (or output) TFC TVC TC AFC AVC ATC MC 0 500 0 100 500 700 200 500 1300 300 500 1800 400 500 2500 500 500 3800 600 500 4300 700 500 6000 : Where is marginal cost on this graph?
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4 : Why does MC intersect AC at AC lowest point? Math: When MC is below average cost, the cost of producing one more unit of output is less than average cost of all units produced thus far, so producing one more will bring down costs Think of your grades in a class. Where is AFC on the graph? Explain why AFC is decreasing.
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5 A simple example (with no fixed costs) Qty TC MC 1 5 2 15 3 30 4 50 Graph MC: Show total cost on this graph: Does this remind you of anything? Why does MC decrease then increase?
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IV. Diminishing (Marginal) Returns and Production in the Short Run Total Product - The output from a given combination of inputs Marginal product - The additional output produced when 1 more input is used Marginal product of Labor - Marginal product of Capital - Law of diminishing (marginal) returns - As more and more of any input is added to a fixed amount of other inputs, it marginal product will eventually decline Intuition ? Average Product
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07_Producer1_ - Firms Basic Producer Theory(Costs...

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