Lecture Issues in economics today - Chapter 5

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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.

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Nội dung Text: Lecture Issues in economics today - Chapter 5

Chapter 5 Firm Production, Cost, and Revenue McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Chapter Outline • Production • Costs • Revenue • Profit and Profit Maximization McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Basic Definitions • Profit: The money that business makes: Revenue minus Cost • Cost: the expense that must be incurred in order to produce goods for sale • Revenue : the money that comes into the firm from the sale of their goods McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Economic vs. Accounting Cost • Economic Cost: All costs, both those that must be paid as well as those incurred in the form of forgone opportunities, of a business • Accounting Cost: Only those costs that must be explicitly paid by the owner of a business McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Production • Production Function: a graph which shows how many resources we need to produce various amounts of output • Cost Function: a graph which shows how much various amounts of production cost McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Inputs to Production • Fixed Inputs: resources that you cannot change • Variable Inputs : resources that can be easily changed McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Concepts in Production • Division of Labor: workers divide up the tasks in such a way that each can build up a momentum and not have to switch jobs • Diminishing Returns: the notion that there exists a point where the addition of resources increases production but does so at a decreasing rate McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 1 The Production Function Output D Production C Function B A Workers McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
A Numerical Example Labor Total Output Extra Output of the Group 0 0 1 100 100 2 317 217 3 500 183 4 610 110 5 700 90 6 770 70 7 830 60 8 870 40 9 900 30 13 1000 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Costs • Fixed Costs: costs of production that we cannot change • Variable Costs: costs of production that we can change McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 2 The Total Cost Function Total Cost D Total Cost Function C B A Output McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Cost Concepts • Marginal Cost: the addition to cost associated with one additional unit of output • Average Total Cost: Total Cost/Output, the cost per unit of production • Average Variable Cost: Total Variable Cost/Output, the average variable cost per unit of production • Average Fixed Cost: Total Fixed Cost/Output, the average fixed cost per unit of production McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 3 Marginal Cost, Average Total, Average Variable, and P Average Fixed Cost MC ATC AVC AFC Q McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Numerical Example Output TVC TFC TC MC* ATC AVC AFC 0 0 8500 8500 100 2500 8500 11000 25 110 25 85 200 3800 8500 12300 13 62 19 43 300 4800 8500 13300 10 44 16 28 400 6000 8500 14500 12 36 15 21 500 7500 8500 16000 15 32 15 17 600 9500 8500 18000 20 30 16 14 700 12500 8500 21000 30 30 18 12 800 17000 8500 25500 45 32 21 10.6 900 22500 8500 31000 55 34 25 9.4 1000 32500 8500 41000 100 41 32.5 8.5 * MC is per 100 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Revenue • Marginal Revenue : additional revenue the firm receives from the sale of each unit McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 4 Setting the Price When There are Many Competitors P P S P* P*=Marginal Revenue D Market for Memory Our Firm McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Figure 5 Marginal Revenue When there are No P Competitors MR D Market for Memory McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Numerical Example For the Many Competitors Case Q P TR MR* 0 45 0 100 45 4,500 45 200 45 9,000 45 300 45 13,500 45 400 45 18,000 45 500 45 22,500 45 600 45 27,000 45 700 45 31,500 45 800 45 36,000 45 900 45 40,500 45 1000 45 45,000 45 * MR is per 100 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Numerical Example For the No Competitors Case Q P TR MR* 0 75 0 100 70 7,000 70 200 65 13,000 60 300 60 18,000 50 400 55 22,000 40 500 50 25,000 30 600 45 27,000 20 700 40 28,000 10 800 35 28,000 0 900 30 27,000 -10 1000 25 25,000 -20 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Maximizing Profit • We assume that firms wish to maximize profits McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.