Test 3 Information Two Types of Production Costs Explicit costs o Implicit costs 3 12 14 o A cost that has been incurred in using any resource for which there is not direct cash outlay during the period the resource was being used Example Depreciation costs of equipment such as tractors or other machinery Opportunity cost o The cost borne by the producer when a resource that is currently being used for one activity is used in its next most valuable profitable activity Another type of implicit cost o Examples include interest made on money in the bank instead of invested in farming activities land presently farmed for corn making 500 acre that could be farmed for wheat that would generate 300 acre The 300 would be the opportunity cost for each acre to the farmer o What s the next highest and best use I can get from something ex land I could make 500 dollars turning that land into a soybean farm but I could sell that land for 800 dollars and it would be a bigger profit o Represents the true costs of production Bookkeeping profit o Revenues minus expenses Economic pure profit o Revenues minus explicit and implicit opportunity costs Economic profit is the amount by which net earnings exceed payment required to attract it to or keep it in its present use Variable costs Fixed costs o Costs that increase or decrease as output changes o As output changes these change o Costs incurred for resources that do not change as output is change o Sunk cost you ve already paid that and you could lose it if you don t best maximize profit Length of run o A planning concept that defines the level of flexibility in how resources inputs can be change in the production process In the long run you have a lot more flexibility In many cases farmed face management decisions between the long run and short run where some inputs are fixed and others are variable A farmer who has already planted a crop cannot change the amount of land he she has planted fixed input but may vary the amount of fertilizer pesticides and irrigation variable inputs that are used Immediate short run o A span of time so short that no resources input changes can be made in the production process all variables are considered fixed Ultimate long run Review of past 3 chapters o A span of time long enough that all resources input o Chapter 4 o Chapter 5 Found profit maximizing levels of inputs One variable input allowed to vary all other inputs fixed Found profit To this point inputs costs have determined profit maximizing inputs levels What level of output maximizes our profits given variable costs and fixed Terms costs o Total variable costs TVC Total spending for the variable input For the total amount of variable inputs you have o Total fixed costs TFC o Total cost TC o Total revenue TR The total costs of all other inputs that do not change as output changes Sum of total variable costs TVC and total fixed costs TFC Synonym of TVP in chapter 5 calculated as price per unit of output multiplied by total output level o Pure profits Total revenue TR minus total costs TC o Average variable costs Amount spent on the variable input per unit of output AV TVC Y Y represents the level of output for all slides in chapter 6 Take our totals divided by the amount of outputs to get the average o Average fixed costs AFC o AFC The cost of fixed resources inputs per unit of output TFC Y Average fixed cost declines after that peak Total costs of all the resources inputs used per unit of output produced o Average total costs ATC TC Y TVC TFC Y o Average variable costs AVC TVC Y o Marginal cost MC TC Y TVC Y Y represents the level of output for all slides in chapter 6 The change in total cost when output is changed by one unit Remember means change in Can use either TC or TVC in numerator because TFC does not change as the level of output changes o Marginal revenue MR The amount added to total revenue when an additional unit of output is produced and sold It is just the price of the output MR TR Y P y P y is the price of the output Y o Maximize profit where marginal revenue equals marginal cost o No difference between marginal total cost and marginal variable cost o Four most important cost components relative to marginal revenue Average total cost Average variable cost Average fixed cost Marginal cost o Just because marginal cost is equal to marginal revenue does not mean we are making money o Relationship between production and variable costs If we remember the TPP curve from chapter 4 where output changes with incremental increases in the input The curve has three regions Convex region 1 input increase results in 1 output increase o During this portion the input is more productive in o As a result the marginal cost of producing an additional producing the output unit of output declines o Marginal costs continue the decline until one reaches the end of the convex portion of the TPP curve the point where MPP is maximized o The end point is the inflection point Concave region 1 input increase results in a 1 output increase o Increasing at a decreasing rate Negative returns where incremental increases in input resulted in less output Relationship between the production function and costs During the concave portion of the TPP curve the productivity of inputs being converted to outputs declines Hence the marginal costs of producing an additional unit of output in this area of the production function increases These costs continue to increase until the TPP is maximized MPP O At that point the MC curve becomes vertical Graph Inflection point Point where MPP is maximized and where marginal costs are minimized Total cost variable cost fixed cost As marginal cost goes down it pulls down variable cost with it 1 We determine the quantity we produce based on setting Shut down point lowest point on the supply curve where marginal costs are exactly equal to marginal variable costs From the shut down point the supply curve is the marginal cost curve AFC starts out high and goes to the lowest one AVC and ATC are very similar start out high and reach a minimum where they intersect the MC curve AVC is lower than ATC because it is a component of AVC Shut down point MC equals AVC Supply curve and MC curve are the same Relationship Between the Production Function and Costs Similarly the AVC is minimized at the same point in the production function where APP is maximized AFC continues to decline as more output is added minimum reached where TPP is maximized ATC minimized at