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1. Organize factors of production and/or2. Produce goods and services and/or3. Sell produced goods and services
• A virtual firm organizes production and subcontracts out all work
• Many of the organizational structures of business are being separated from the
production process
explicit
implicit (opportunity)
total
economic
normal
accounting
The factory size can change
Long Run
Factors like labor and raw materials can be changed
Short Run:
laborraw materials
• Long run and short run do not necessarily refer to specific periods of time, but to the flexibility the firm has
in changing the level of output
The least cost combination of inputs.
Efficient Production
The recipe: going from inputs to outputs
It varies by firm
Labor Total Marginal AverageData: Output
0 01 32 83 124 155 176 18
___
______
___
______
35432
1
______
___
______
3443.75
3.4___3
Output
Quantity of Labor
18
15
12
9
6
3
1 2 3 4 5 60
Total Output
Output
Quantity of Labor
6
5
4
3
2
1
1 2 3 4 5 60
Average and Marginal
Like Labor
In the beginning, output increases with each unit added, but at some point output will begin to decrease
with each additional unit of a resource.
The Law of Diminishing Returns
Labor Total Marginal AverageData: Output
0 01 32 83 124 155 176 18
___
______
___
______
35432
1
______
___
______
3443.75
3.4___3
Increasing marginal
productivityDiminishing
marginal productivity
DiminishingAbsolute
productivity
Total Fixed Costs
Do change with output
Do not change with output
Total Variable CostsTotal Costs = TFC + TVC
rent
bourbon scotch beer
Average Fixed Costs
Do change with outputDo not change with output
Average Variable CostsAverage Total Costs = ?+?Marginal CostChange in cost with 1 more
output
She produces these in her own home without any help, unless she has a large number of orders on a
particular day.
Marcia Deal bakes and decorates large, elaborate,
multi-layered, special occasion cakes.
# TC TFC TVC ATC MC
0
1
2
3
4
5
6
7
8
With the following information, complete the table:
The total cost of producing 5 cakes is $135Marcia’s total fixed cost for 1 cake is $25
The total cost of 2 cakes is $60
The total variable cost for 1 cake is $25
The total variable cost of producing 7 cakes is $220The marginal cost of the 6th cake is $45
The marginal cost for the 8th cake is $91The ATC per cake when 3 cakes or when 4 cakes are made is $25
Why is the Marginal Cost of the 7th and 8th cakes fairly high?
If Marcia can sell from 0 - 8 cakes at $40 each, how many will she choose to
produce and sell per day if she is trying to maximize her profits??
On the graph, plot the average total cost and marginal cost of producing
from 0 – 8 cakes.Plot the marginal cost at the
midpoints
$120
110
100
90
80
70
60
50
40
30
20
10
01 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
Graph Marcia’s ATC, MC and MR
$120
110
100
90
80
70
60
50
40
30
20
10
01 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
Graph Marcia’s ATC, MC and MR
Number of Cakes
Total Revenue
Total CostTotal Profit
Marginal Revenue
Marginal Cost
0
1
2
3
4
5
6
7
8
$350
300
250
200
150
100
50
01 2 3 4 5 6 7 8 Number of
Cakes
Tota
l C
ost
Graph Marcia’s TC, TFC and TVC
$350
300
250
200
150
100
50
01 2 3 4 5 6 7 8 Number of
Cakes
Tota
l C
ost
Graph Marcia’s TC, TFC and TVC
Output TFC TVC TC0 100 0 1 50
2 90
3 120
4 160
5 220
6 300
7 400
8 5209 670
10 900
______
___
___
___
___
____________
100
100
100
100
100
100
100
100
100
100
100
150
190
220
260
320
400
500
620
770
1000
______
___
___
___
___
____________
Output AFC AVC ATCMC0 (TFC/output) (TVC/output) (TC/output) (TC1-TC0)
1 ________ ________ ________ _____
2 ____________ ____________ ____________ _______
3 ____________ ____________ ____________ _______
4 ____________ ____________ ____________ _______
5 ____________ ____________ ____________ _______
6 ____________ ____________ ____________ _______
7 ____________ ____________ ____________ _______
8 ____________ ____________ ____________ _______
9 ____________ ____________ ____________ _______
10 ____________ ____________ ____________ _______
1
2
3
4
5
6
7
8
9
10
100
50
33
25
20
17
14
12
11
10
50
45
40
40
44
50
59
65
74
90
150
95
73
65
64
67
73
78
85
100
50
40
30
40
60
80
100
120
150
230
Cost
Output
600
500
400
300
200
100
1 2 3 4 5 60 7 8 9 10
Total Variable Cost
Total Fixed Cost
Total Cost
700
800
900
Cost
Output
60
50
40
30
20
10
1 2 3 4 5 60
Graphed
7 8 9 10
70
80
90
and
The Relationship Between Marginal Productivity and Marginal Costs
AVC
Q
MC
Q
Output per worker
Costs per unit
If marginal productivity is rising, marginal costs are falling
If average productivity is falling, average costs are rising
MP of workers
AP of workers
12-24
• If MC > ATC, then ATC is rising
• If MC > AVC, then AVC is rising
• If MC < ATC, then ATC is falling
• If MC < AVC, then AVC is falling
• If MC = AVC and MC = ATC, then AVC and ATC are at their minimum points
The Relationship Between Marginal Cost and Average Cost
12-25
The Relationship Between Marginal Cost and Average Cost
AVC
MC
Q
Costs per unit
ATCThe marginal cost curve
goes through the minimum point of both the ATC and AVC curves
12-26
1. Which of the following is most likely to be an implicit cost of production?
a. property taxes on a building owned by the firmb. transportation costs paid to a trucking supplierc. rental payments for a building utilized by the company and rented
from another partyd. interest income foregone on funds invested in the firm by the
owners
2. The law of diminishing returnsa. explains why marginal cost eventually increases as output expands.b. implies that average fixed cost will remain unchanged as output expands.c. is true for physical production activities but not for activities such as studying.d. applies to a capitalist economy but would be irrelevant if the means of production were owned by the state.
3. Which of the following represents a long-run adjustment?a. the hiring of four additional cashiers by a supermarketb. a cutback on purchases of coke and iron ore by a steel manufacturerc. construction of a new assembly-line plant by a car manufacturerd. the extra dose of fertilizer used by a farmer on his wheat crop
4. The short-run average total cost (ATC) curve of a firm is U-shaped becausea. larger firms always have lower per-unit costs than smaller firms.b. at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns.c. diminishing returns will be present when output is small, and high AFC will push per-unit cost to high levels when output is large.d. diseconomies of scale will be present at both small and large output rates.
5. When costs that vary with the level of output are divided by the output, you have calculated
a. total changing cost. b. total fixed cost.c. average fixed cost. d. average variable cost.
6. In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be a. $25. b. $2,500. c. $5,000. d.$7,500.
At what output in the graph would the firm’s per-unit cost of production be minimized?a.3 b. 4 c. 5 d. 6What is the firm’s approximate total cost when it produces three units?a.10 b. 16 c. 48 d. 60
What is the firm’s total cost when it produces four units?a.11 b. 15 c. 60 d. 75 The average variable cost and average
total cost for a firm are indicated in the graph. If the marginal cost curve were constructed, at what output would it cross the AVC curve?a. 10 b. 15 c. 20 d.
25At what output should a the marginal cost curve cross the ATC curve?a. 15 b. 20 c. 25 d.
30
b. 4
c. 48
c. 60
b. 15
b. 20