A firm's actual cash payments for its inputsIMPLICIT .ppt

1、A firms actual cash payments for its inputs IMPLICIT COSTS Opportunity costs of non-purchased inputs such as the entrepreneurs time and money. opportunity cost of something is what you sacrifice to get it. Opportunity cost of the entrepreneurs time:Time given up to operate a firm; Opportunity cost o

2、f funds:Money given up to set up and run a business.,EXPLICIT COSTS,Economic Cost,The sum of explicit and implicit costs. The economic cost is higher because the economist includes implicit costs but the accountant does not.,Accounting versus Economic Cost,Explicit Cost(Purchased Inputs) $60,000 $60

3、,000Implicit Cost(Opportunity cost of $30,000entrepreneur)(Opportunity cost of $10,000funds)- - Total Cost $60,000 $100,000,Accounting EconomicApproach Approach,SHORT RUNA period of time over which at least one input to production is fixed. For most firms, the fixed input is capital: firm cannot mod

4、ify production facility or build a new facility. LONG RUNA period of time over which a firm is perfectly flexible in its choice of inputs.In the long run, a firm can build a new production facility (factory,store, office or restaurant) or modify an existing facility, hire a workforce, and buy raw ma

5、terials.,TIME PERIODS,Time Period Decisions,Short RunHow much output to produce;Long RunWhat type of production facility to build;,Principle of Diminishing Returns,Suppose an output is produced with two or more inputs, and we increase one input while holding the other inputs fixed. Beyond some point

6、 - called the point of diminishing returns - output will increase at a decreasing rate.,Computer Chip Manufacturing,As firm packs more and more workers into factory, total output increases, but at a decreasing rate. -flipping this around- As the firm steadily increases its output, the firm requires

7、more and more workers to increase its output by a single chip.,Diminishing Returns and Increasing Marginal Cost,For One More Chip Quantity of Additional Additional Additional Marginal Chips Labor Time Labor Cost Material Cost Cost Small: 100 2 hours $16 $10 $26 Medium: 300 6 hours $48 $10 $58 Large:

8、 400 10hours $80 $10 $90,Short-Run Marginal Cost,The change in total cost resulting from a one-unit increase in the output of an existing production facility.,Short-Run Marginal and Average Cost Curves,90,68,58,26,100,300,400,t,e,f,m,s,short-run average total cost curve (SATC),short-run marginal cos

9、t curve (SMC),Marginal or Average Cost $,Quantity of Chips produced per hour,QUANTITY SMC SATC100 26 90300 58 58400 90 68,Short-Run Average Total Cost (SATC),Equals the total cost divided by the quantity of output, or the cost per unit output. Total cost is the sum of the fixed cost per chip, the la

10、bor cost per chip, and the material cost per chip. U-shaped.,Short-Run Average Total Cost,QUANTITY OF CHIPSSMALL MEDIUM LARGE Number of Chips 100 300 400 Fixed Cost / Chip($) 72 24 18 Labor Hours 100 900 2,000 Labor Cost ($) 800 7,200 16,000 Labor Cost / Chip ($) 8 24 40 Material Cost / Chip ($) 10

11、10 10 Total Cost / Chip ($) 90 58 68,Short-Run Average Total Cost,QUANTITY OF CHIPSSMALL MEDIUM LARGE Number of Chips 100 300 400 Fixed Cost ($) 7,200 7,200 7,200 Fixed Cost / Chip($) 72 24 18 Labor Hours 100 900 2,000 Labor Cost ($) 800 7,200 16,000 Labor Cost / Chip ($) 8 24 40 Material Cost ($) 1

12、,000 3,000 4,000 Material Cost / Chip ($) 10 10 10 Total Cost ($) 9,000 17,400 27,200 Total Cost / Chip ($) 90 58 68,Average Costs,As production increases:Fixed cost per chip decreases from $72 to $24 to $18;Labor cost per chip increases from $8 to $24 to $40;Material cost per chip doesnt change $10

13、. Cost is lowest ($58) at the medium level of production.,Marginal & Average-Total Cost Relationship,Short-run average total cost is at its minimum value where average total cost and marginal cost are equal. Average total cost slope = 0. If marginal cost is less than average total cost, average tota

14、l cost is decreasing - has a negative slope. If marginal cost is greater than average total cost, average total cost is increasing - has a positive slope.,Quantity SATC SAVC AFC100 90 18 72300 58 34 24400 68 50 18,SHORT-RUN AVERAGE COST CURVES,Average cost per chip ($),t,u,m,v,p,n,f,g,h,100,300,400,

15、18,24,34,50,58,68,72,90,Short-run average total cost (SATC),Short-run average variable cost (SAVC),Average Fixed Cost,Quantity of Chips per Hour,SATC = SAVC + AFC,LONG-RUN AVERAGE COST,Total cost divided by the quantity of output when the firm can choose a production facility of any size The long-ru

16、n average cost curve is L-shaped, initially the result of economies of scale.,Economies of Scale,Cost saving associated with scaling up - adding more capital, labor and materials to produce more output may be caused by either of two effects: Indivisible inputs; Specialization,2.80,2.10,1.60,1.00,0.5

17、0,1.00,1.50,2.00,2.50,b,c,d,e,f,LONG-RUN AVERAGE COST CURVEFOR ALUMINUM PRODUCTION,Long-run average cost curve,Average cost $ per pound,Millions of Pounds of Aluminum per year,Indivisible Inputs,Inputs which cannot be scaled down to produce a small quantity of output. Examples: Railroad track betwee

18、n two cities cannot be scaled from two to one track. An industrial mold must be complete to produce many copies or a single copy.,Specialization,In a small operation with just a few workers, each performs a wide variety of tasks. In a large operation with many workers, each worker specializes in one

19、 or two tasks, and is more productive because: Repetition increases productivity; Workers spend less time switching from task to task.,Minimum Efficient Scale,The output at which the long-run average cost curve becomes horizontal.,INDUSTRIES EXPERIENCING MINIMUM EFFICIENT SCALE,INDUSTRY MINIMUM EFFI

20、CIENT SCALEBritish Sulfuric Acid 1 million tonsBritish Steel 9 million tonsU.S. Automobiles 200,000 to 400,000 per yearLarge U.S. Breweries 4.5 million barrels,DISECONOMIES OF SCALE,Increase in output leads to increases in the average cost of production: higher costs accompany scaling up. Diseconomi

21、es may occur for two reasons: Coordination problems; Increasing input costs.,Coordination Problems,Large organizations require several layers of management (a bureaucracy) to coordinate the activities of the different parts of the organization. This leads to a positively sloped average-cost curve.,I

22、ncreasing Input Costs,As a firm increases its output, it will demand more of each of its inputs, which may lead to higher prices for some inputs. Higher prices increases the average cost of production, resulting in a positively sloped average-cost curve.,FOUR TYPES OF MARKETS,Perfect Competition -A

23、market with a very large number of firms, each of which produces the same standardized product and takes the market price as given.A price-taking firm.,FOUR TYPES OF MARKETS,Perfect Competition EXAMPLES The wheat farmer, The average stock investor,FOUR TYPES OF MARKETS,Monopolistic Competition -Ther

24、e are many firms, each sells a differentiated product. Because products sold by different firms are not perfect substitutes, each firm has some control over price. There are no barriers to entering the market.,FOUR TYPES OF MARKETS,Monopolistic competition - EXAMPLES restaurants, retail stores, gas

25、stations, clothing,FOUR TYPES OF MARKETS,Oligopoly - There are just a few firms in the market, a result of two sorts of barriers to entry: economies of scale, government may limit number of firms in the market,FOUR TYPES OF MARKETS,Oligopoly EXAMPLES automobiles, airline travel, breakfast cereals,FO

26、UR TYPES OF MARKETS,Monopoly -A single firm serves the entire market. A monopoly occurs when the barriers to entry are very strong, which could result from very large economies of scale or a government limit on the number of firms.,FOUR TYPES OF MARKETS,Monopoly - EXAMPLES large scale economies: loc

27、al phone service, electric power generation, established by government policy: drugs covered by patents, concessions in National Parks,Characteristics of Different Types of Markets,Perfect Monopolistic Oligopoly Monopoly Competition Competition Number very large many few one,of firms Type of standar

28、dized differentiated std or diff. unique,product Control none slight considerable considerable,over price if not,regulated Entry no barriers no barriers large large,conditions barriers barriers Examples wheat restaurants automobiles local phone,soybeans retail stores air travel and electric,clothing

29、 breakfast patented,cereal drugs,TOTAL REVENUE,The money the firm gets from selling its product and is equal to price times quantity sold: Total Revenue = price * quantity,ECONOMIC PROFIT,Total revenue - total economic costTotal economic cost = explicit costs( firms actual cash payments for inputs ) + implicit costs ( opportunity costs of non-purchased inputs, such as entrepreneurs time or money ),