COSTS OF PRODUCTIONPut another way:PowerPoint PresentationSlide 4Slide 5Slide 7Slide 8Slide 9Slide 10Slide 12AVERAGE COSTSlide 14MARGINAL COSTSlide 17Slide 19Slide 20Slide 21Slide 22COST CURVE SUMMARY:Short-run costs slide 1COSTS OF PRODUCTIONCOSTS OF PRODUCTIONGeneral principle: If you know the technology of production (the production function or total product curve), and if you know the prices of the inputs to production, then you can find the firm’s costs at any level of output.Short-run costs slide 2Put another way:Put another way:Costs are determined by the technology of production and input prices.Let’s start with the total product curve for apples from the last section, and show how to get to costs of production.Short-run costs slide 3APPLE PRODUCTION IN A MICHIGAN ORCHARDOutput Labor (bu.) (worker-days)0 04000 10016000 20027000 30032000 40034000 53135000 65636000 79937000 96038000 116539000 1411Short-run costs slide 4Suppose labor costs $56 per day.PL = $56/dayIf labor is the only variable input, we can find the total variable costs at each output level.Short-run costs slide 5APPLE PRODUCTION IN A MICHIGAN ORCHARDOutput Labor Wage VC(bu.) (worker-days) ($/Wkr-day) $0 0 56 04000 100 56 560016000 200 56 1120027000 300 56 1680032000 400 56 2240034000 531 56 2973635000 656 56 3673636000 799 56 4474437000 96038000 1165 56 6524039000 1411 56 79016Click here for hidden slideShort-run costs slide 7THE TOTAL VARIABLE COST CURVE shows the total variable cost at each level of output.In the total variable cost curve the independent variable is OUTPUT, and the dependent variable is TOTAL VARIABLE COSTS.Short-run costs slide 80200004000060000800000 10000 20000 30000 40000 50000TVCQShort-run costs slide 9If there are fixed costs (costs associated with inputs that can’t be changed), then we can add these to the total variable costs to get total costs.Total Cost = Fixed Cost + Total Variable CostTC = FC + TVCShort-run costs slide 10Output VC FC TC(bu.) ($) ($) ($)0 0 140000 1400004000 5600 140000 14560016000 11200 140000 15120027000 16800 140000 15680032000 22400 140000 16240034000 29736 140000 16973635000 36736 140000 17673636000 44744 140000 1847443700038000 65240 140000 20524039000 79016 140000 21901645000 308000 140000 448000APPLE PRODUCTION IN A MICHIGAN ORCHARDClick here for hidden slide.Short-run costs slide 120500001000001500002000002500003000003500004000004500005000000 10000 20000 30000 40000 50000Q$TCTVCShort-run costs slide 13AVERAGE COSTAVERAGE COSTAverage cost: Cost per unit of output. Total cost divided by output. TC/Q.Average cost curve: The curve that shows average cost as a function of output. Output is the independent variable and average cost is the dependent variable.Short-run costs slide 14Output TC AVC AFC AC(bu.) $ $/bu. $/bu. $/bu.0 140000 N/A N/A N/A4000 145600 1.40 35.00 36.4016000 151200 0.70 8.75 9.4527000 156800 0.62 5.19 5.8132000 162400 0.70 4.38 5.0834000 169736 0.87 4.12 4.9935000 176736 1.05 4.00 5.0536000 184744 1.24 3.89 5.133700038000 205240 1.72 3.68 5.4039000 219016 2.03 3.59 5.6245000 448000 6.84 3.11 9.96APPLE PRODUCTION IN A MICHIGAN ORCHARDClick here for hidden slide.Short-run costs slide 16MARGINAL COSTMarginal cost: The change in total cost per unit change in output. The increase in cost due to producing one more unit of output. The slope of the total cost curve. TC / Q.Marginal cost curve: The curve that shows marginal cost as a function of output. The independent variable is output. The dependent variable is marginal cost.Short-run costs slide 17Output TC AVC AFC AC MC(bu.) $ $/bu. $/bu. $/bu. $/bu.0 140000 N/A N/A N/A N/A4000 145600 1.40 35.00 36.40 1.4016000 151200 0.70 8.75 9.45 0.4727000 156800 0.62 5.19 5.81 0.5132000 162400 0.70 4.38 5.08 1.1234000 169736 0.87 4.12 4.99 3.6735000 176736 1.05 4.00 5.05 7.0036000 184744 1.24 3.89 5.13 8.013700038000 205240 1.72 3.68 5.40 11.4839000 219016 2.03 3.59 5.62 13.7845000 448000 6.84 3.11 9.96 38.16APPLE PRODUCTION IN A MICHIGAN ORCHARDClick here for hidden slide.Short-run costs slide 190.001.002.003.004.005.006.007.008.009.000 10000 20000 30000 40000 50000Q$/QACMCAVCShort-run costs slide 20Of course, the marginal and average cost curves must conform to the usual rules about marginal and average curves.1) When the average is rising, the marginal quantity must be greater than the average quantity.2) When the average is falling, the marginal quantity must be less than the average quantity.3) When the average is neither rising nor falling (at a maximum or minimum), average and marginal are equal.Short-run costs slide 21Notice that the general shape of the AC and MC curves can be deduced by looking as the TC curve.(Review, if necessary, the techniques for finding AP and MP curves by inspecting TP curves covered in the last section.)Short-run costs slide 220500001000001500002000002500003000003500004000004500005000000 10000 20000 30000 40000 500000.001.002.003.004.005.006.007.008.009.000 10000 20000 30000 40000 50000Label all of the axes and curves in the two diagrams.Short-run costs slide 23COST CURVE SUMMARY:COST CURVE SUMMARY:Costs depend output, technology, and input prices.There are two ways to depict a firm’s costs:1) Total cost curves2) Average and marginal cost