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Unformatted text preview: tory, in which the toy
can be produced. She also needs insurance,
employees, machines, certain materials for
producing the toy (such as plastic and rubber), paper, pens, computers, electricity, and
much more. Consider one of the many
things Torres needs—a plant. Currently, she
rents a plant from Terry Adams. The rental
contract specifies that Torres agrees to pay
Adams $2,000 rent each month for 12
months.
What if Torres does not want to rent the
plant after she has paid only three months’
rent? Must she pay rent for the remaining
nine months? Given the contract that Torres
and Adams entered into, the answer is yes. In
other words, no matter whether Torres produces 1 toy, 1,000 toys, 10,000 toys, or even
zero toys in the plant each month, she still
has the legal obligation to pay rent of $2,000
a month for 12 months. 172 Chapter 7 Business Operations Costs, or expenses, that are the same no
matter how many units of a good are produced are called fixed costs. The $2,000 rent
is a fixed cost for Torres for a period of 12
months.
Bobby pays a business tax
of $1,000 a year no matter how many paper
boxes he produces and sells. The business tax
is a fixed cost. Taryn pays $1,500 in insurance for her small store each year, no matter
how much she sells. The $1,500 insurance
payment is a fixed cost.
EXAMPLE: Now suppose Torres employs 10 workers
and pays each $50 a day. Her labor cost per
day is $500. One day, she gets a special order
for many hundreds of toys. To meet the
order, she hires five additional workers at
$50 per day. As a result, her weekly labor
costs increase by $250, to a total of $750.
Notice that the increase in labor cost goes
along with an increase in the number of toys
being produced. Costs, or expenses, that
vary, or change, with the number of units of
a good produced are called variable costs.
If we add fixed costs to variable costs, we
have total costs: 07 (154185) EMC Chap 07 5/8/06 Total costs 4:54 PM Fixed costs Page 173 Variable costs Suppose we want to compute total costs
for a month. If fixed costs are $2,000 for the
month and variable costs are $750, then total
costs are $2,750 for the month.
Jimmy pays $2,000 rent a
month on the factory and $1,800 a month
for each of the 20 employees he hired. His
fixed costs are $2,000 a month, and his variable costs are $36,000 a month. It follows,
then, that his total costs are $38,000 a
month.
EXAMPLE: Average Total Cost
Suppose a teacher gives a test to five students. The grades are as follows: 80, 90, 100,
60, and 75. The total number of points—the
sum of the individual grades—is 405. To
find the average grade, we divide the total,
405, by the number of students, 5. The average grade on the test is 81.
Similarly, to compute the average total
cost ( ATC), or perunit cost, simply
divide total cost (TC) by the quantity of
output (Q):
Average total cost (ATC) TC
Q For example, if total cost is $6,000 and 1,000
units of a good are produced, then average
total cost is $6 per unit ($6,000/1,000 = $6). Marginal Cost: An Important...
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This document was uploaded on 01/16/2014.
 Winter '14
 Economics

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