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Costs of Production Chapter 13 Week 10 Key Assumption Profit Maximization Profit Total Revenue Total Cost Total Cost all opportunity costs Explicit vs Implicit Examples of implicit costs income that could have been earned by firm s owner investment return that could have been made on money put into the firm Economists vs Accountants How an Economist Views a Firm How an Accountant Views a Firm Economic profit Accounting profit Revenue Implicit costs Explicit costs Revenue Total opportunity costs Explicit costs Copyright 2004 South Western Production Function Workers L Output Q Marginal Product dQ dL 0 0 0 1 50 50 2 90 40 3 120 30 4 140 20 5 150 10 Production Function From the Production Function to the Total Cost Curve For total cost curve quantity is marked along the horizontal axis and total cost is marked along the vertical For every quantity calculate the total cost Total Cost Fixed Cost Variable Cost Fixed Cost cost of setting up the business plant equipment fixed costs are the same regardless of the quantity produced Variable Cost labor and raw materials that can be varied with the scale of operation Calculating Total Cost L Q FC VC TC 0 0 30 0 30 1 50 30 10 40 2 90 30 20 50 3 120 30 30 60 4 140 30 40 70 5 150 30 50 80 Total Cost Curve The following table shows a fisherman s output Calculate the marginal product for each hour worked Does he experience diminishing returns Suppose the opportunity cost of his time is 5 hour and his fixed cost is 10 Graph his total cost function Hours Quantity of Fish 0 1 2 3 4 5 0 10 18 24 28 30 Five Different Cost Curves 1 2 3 4 5 Total Cost TC Average Total Cost ATC TC Q Average Fixed Cost AFC FC Q Average Variable Cost AVC VC Q Marginal Cost MC TC Q Calculating Marginal Cost Q 0 1 2 3 4 5 6 7 8 9 10 TC 3 00 3 30 3 80 4 50 5 40 6 50 7 80 9 30 11 00 12 90 15 00 MC 0 30 0 50 0 70 0 90 1 10 1 30 1 50 1 70 1 90 2 10 Thirsty Thelma s Total Cost Curve Figure 5 Thirsty Thelma s Average Cost and MarginalCost Curves Costs 3 50 3 25 3 00



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