Chap 13 The costs of production.pptVIP

The Costs of Production Chapter 13 Unit 1 production function Unit 2 cost Unit 3 To the Explicit costs The Firm’s Objective The economic goal of the firm is to maximize profits. A Firm’s Profit Profit = Total revenue - Total cost Unit 1 production function The production function shows the relationship between quantity of inputs used to make a good and the quantity of output of that good. Factors of production labor,L capital，K natural resource，N entrepreneur, E So ….. production function Q=f( K , L, N, E) Diminishing Marginal Product Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment. Long run product function Q = f (L,K) Unit 2 cost About cost? A firm’s cost of production includes all the opportunity costs of making its output of goods and services. Explicit costs Vs. Implicit costs Explicit costs involve a direct money outlay(expend) for factors of production. Implicit costs do not involve a direct money outlay. Example: profit (from a accountant) =total revenue - explicit costs. =6000-3000 (if work for another company you can earn 2000?) profit (from a economist) =total revenue -all the opportunity costs = total revenue -(explicit and implicit). =6000-3000-2000 Economic Profit versus Accounting Profit Unit 3 To the Explicit costs 1.Cost in a short-run 2.Cost in a long-run In the short run some costs are fixed. In the long run fixed costs become variable costs. 1.Cost in a short-run Fixed and Variable Costs Fixed costs are those costs that do not vary with the quantity of output produced.(constant=b) For example Variable costs are those costs that do change as the firm alters the quantity of output produced. Total cost Total Fixed Costs (TFC) Total Varia