ch13—TheCostsofProductìon.pptVIP

12 The Costs of Production * * Thinking at the margin helps not only Jack, but all managers in the real world, who make business decisions every day by comparing marginal costs with marginal benefits. * * * * * * * * * * * * * * * * In the next chapter, we will learn more about how firms choose Q to maximize their profits. * * If you did Active Learning 1 and created a class-generated list of General Motors’ costs, you might return to that list and ask students which of the costs on their list are fixed and which are variable. * * * * Point out that the TC curve is parallel to the VC curve but is higher by the amount FC. * * * * Most students quickly grasp the following example. Suppose FC = $1 million for a factory that produces cars. If the firm produces Q = 1 car, then AFC = $1 million. If the firm produces 2 cars, AFC = $500,000. If the firm produces 5 cars, AFC = $200,000. If the firm produces 100 cars, AFC = $10,000. The more cars produced at the factory, the smaller is the cost of the factory per car. * * * * Many students have heard the terms “cost per unit” or “unit cost” in other business courses. ATC means the same thing. * * * * * * EXAMPLE 2: Average Total Cost 88.57 80 76 77.50 86.67 110 $170 n/a ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 74.29 14.29 63.33 16.67 56.00 20 52.50 25 53.33 33.33 60 50 $70 $100 n/a n/a AVC AFC TC Q 0 Average total cost (ATC) equals total cost divided by the quantity of output: ATC = TC/Q Also, ATC = AFC + AVC Evaluation only. Created with Aspose.Slides for .NET 3.5 Client Profile 5.2.0.0. Copyright 2004-2011 Aspose Pty Ltd. Usually, as in this example, the ATC curve is U-shaped. $0 $25 $50 $75 $100 $125 $150 $175 $200 0 1 2 3 4 5 6 7 Q Costs EXAMPLE 2: Average Total Cost 88.57 80 76 77.50 86.67 110 $170 n/a ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 $100 0 TC Q 0 Evaluation only. Created with Aspose.Slides for .NET 3.5 Client Profile 5.2.0.0. Copyright 2004-2011 Aspose Pty L