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Week 8: Business Costs and Production - Coggle Diagram
Week 8: Business Costs and Production
Accounting and Economic Profits
Accounting profits measure explicit costs
Economic profits measure implicit costs as well
Opportunity costs of time and capital
This profit will always be lower than accounting profit because of opportunity cost
Production Function
Inputs
Labour
Land
Capital
Process
Outputs
The relationship between inputs and outputs
Marginal Product
Change in output divided by change in input
Marginal Product of Labour (MPL)
Green Zone: is where the MPL is Rising
Ambar Zone: MPL is diminishing
Law of diminishing MPL: Successive increase in an input eventually cause output to increase at a slower rate
Red Zone: MPL is Negative
Marginal Product of Capital (MPK)
We want high marginal products
Costs
Short run
Period of production in which at least one of the inputs is fixed
Long Run
Period of production in which all inputs are variable
TVC
Total Variable Costs
TFC
Total Fixed Costs
TC
Total Costs (tvc + tfc)
AVC
Average Variable Costs (TVC / Q)
Graph looks like a U
After time we see diminishing returns
AFC
Average Fixed Costs (TFC / Q)
Graph is a downwards sloping line
ATC
Average Total Costs (TC / Q)
Associated with economies of scale
Also was a kinda U shape
After time we see diminishing returns
Will always be above AVC
MC
Marginal Costs (change in TVC / change in Q) or (change in TC / change in Q)
Marginal costs influence the rest of the cost structures
Where the average sits in relationship to the marginal is very important as mc will influence the movement of the average
MC has the shape of a hockey stick
Marginal Costs and Average Costs
If mc is lower than average, average falls. If mc is higher than average, average rises
MC reaches its minimum before AVC and ATC
AFC falls as Q rises
Minimum point of ATC = efficient scale of production
Costs in the long run
Economies of Scale
ATC Falls when production expands
Larger firm more efficient than a lower firm
One firm is able to beat its competitors because it can produce at a lower cost per unit
Diseconomies of Scale
ATC rises when production expands
Very large firm, has to deal with additional management, coordination, logistics expenses
Eg. infrastructure projects
AVC rising at a larger amount than the AFC falling
Constant Return to Clase
ATC does not change when production expands
