Resource Costs
Profit
  • The difference between total revenue and total cost.
Marginal cost (MC)
  • The increase in total costs associated with a one unit increase in production.
  •          change in total cost
     MC  =  ----------------------
               change in output
  • Whenever MPP is increasing, the marginal cost of producing a good must be falling. 
  • If MPP declines, marginal cost increases.
  • Marginal cost refers to the change in total costs associated with one more unit of output.
  • Diminishing returns in production cause marginal costs to increase as the rate of output is expanded.
Total Cost
  • Total Cost  -  The market value of all the resources used to produce a good or service.
    • Fixed Costs:  Costs of production that do not change when the rate of output is altered.
    • Variable Costs:  Costs of production that change when the rate of output is altered.
Average Costs
  1.                                total costs
    average total costs (ATC)  =  --------------  =  AFC + AVC
                                   total output
  2.                                total fixed costs
    average fixed costs (AFC)  =  -------------------
                                      total output
  3.                                   total variable costs
    average variable costs (AVC)  =  ----------------------
                                          total output
Note 1:  As the rate of output increases, AFC decreases as the fixed cost is spread over more output.
Note 2:  As the rate of output increases, AVC will eventually rise.  AVC rises because of diminishing returns in the production process.
Note 3:  The initial dominance of falling AFC, combined with the later resurgence of rising AVC, is what gives the ATC curve its characteristic U shape.
Note 4:  The bottom of the “U” is important as it represents the minimum average total costs.  It represents the lowest possible opportunity costs to produce the product.  However, the goal of producers is to maximize profit and that might not happen at this point.
Economic vs. Accounting Costs
  • Accounting Costs:  all of the costs that have an explicit dollar cost attached to them.
  • Economic Cost:  the value of all resources used to produce a good or service; opportunity cost.
    • economic cost = explicit costs + implicit costs
Long-Run Costs
  • Long-Run:  a period of time long enough for all inputs to be varied (i.e., no fixed costs).
  • Long-Run Average Costs:  the long-run cost curve is just a summary of our best short-run cost possibilities, using existing technology and facilities.
  • Long-Run Marginal Costs:  the long-run marginal costs curve intersects our long-run cost curve at its lowest point.
Economies of Scale
  • Economies of Scale:  reductions in minimum average costs that come about through increases in the size (scale) of plant and equipment.
  • Constant Returns to Scale:  increases in plant size do not affect minimum average costs: minimum per-unit costs are identical for small plants and large plants.
  • Diseconomies of Scale  
    1. Although large plants may be able to achieve greater efficiencies than smaller plants, there’s no assurance that they actually will.
    2. Diseconomies of Scale occur when an increase in plant size results in reducing operating efficiency.
    3. Efficiency and size do not necessarily go hand in hand.
Labor Costs
  •                      wage rate
    unit labor cost  =  -----------
                            MPP

  • Low wages are not a reliable measure of global competitiveness.
  • A worker’s productivity (MPP) depends on the quantity and quality of other resources in the production process. 
  • Unit labor cost is a true measure of global competitiveness.
  • In order for America to stay competitive in global markets, American productivity must increase as fast as other nations.



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this page is maintained by Reed Fisher
last updated January 15, 2011