1、The Market Forces of Supply andDemand Supply and demand are the two words that economists use most often.Supply and demand are the forces that make market economies work.Modern microeconomics is about supply,demand,and market equilibrium.Economists include all opportunity costs when analyzing a firm
2、,whereas accountant measure only explicit costs.Therefore,economic profit is smaller than accounting profit.How an Economist Views a FirmRevenueTotal opportunity costsEconomic profitHow an Accountants Views a FirmRevenueAccounting profitImplicit costsExplicit costsExplicit costsFigure 1 Economists v
3、ersus AccountantsTable 1 A Production Function and Total Cost:Hungry Helens Cookies FactoryNumber of WorkersOutput(quantity of cookies produced per hour)Marginal Product of LaborCost of FactoryTotal Cost of Inputs(cost of factory+cost of workers)Cost of Workers0 0$30$0$30 1 50 30 10 40 2 90 30 20 50
4、 3 120 30 30 60 4 140 30 40 70 5 150 30 50 80 504030201013.2 Production and Costs The 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.Marginal Product The Marginal product of any input in the pr
5、oduction process is the increase in output that arises from an additional unit of that input.13.2 The Production Function 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
6、 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.A production function shows the relationship between the number of workers hired and the quantity of output produced.Here the number of workers hire
7、d(on the horizontal axis)is from the first column in Table 13-1,and the quantity of output produced(on the vertical axis)is from the second column.The production function gets flatter as the number of workers increase,which reflects diminishing marginal product.Quantity of Output(cookies per hour)Nu
8、mber of Workers HiredProduction function10234540206080100120140Figure 2 Hungry Helens Production Function13.2.1 The Production Function Diminishing Marginal Product The slope of the production function measures the marginal product of an input,such as a worker.When the marginal product declines,the
9、production function becomes flatter.13.2.2 From the Production Function to the Total-Cost Curve The relationship between the quantity a firm can produce and its costs determines pricing decisions.The total-cost curve shows this relationship graphically.Table 1 A Production Function and Total Cost:Hu
10、ngry Helens Cookies FactoryNumber of WorkersOutput(quantity of cookies produced per hour)Marginal Product of LaborCost of FactoryTotal Cost of Inputs(cost of factory+cost of workers)Cost of Workers0 0$30$0$30 1 50 30 10 40 2 90 30 20 50 3 120 30 30 60 4 140 30 40 70 5 150 30 50 80 5040302010A total-
11、cost curve shows the relationship between the quantity of output produced and total cost of production.Here the quantity of output produced(on the horizontal axis)is from the second column in Table 13-1,and the total cost(on the vertical axis)is from the sixth column.The total-cost curve gets steepe
12、r as the quantity of output increases because of diminishing marginal product.Quantity of Output(cookies per hour)Total CostTotal-cost curve200406080 1002010304060$807050120140Figure 3 Hungry Helens Total-Cost CurveFrom the Production Function to the Total-Cost CurveNow compare the total-cost curve
13、in Figure 3 with the production function in Figure 2.These two curves are opposite sides of the same coin.The total-cost curve gets steeper as the amount produced rises,whereas the production function gets flatter as production rises.These changes in slope occur for the same reason.High production o
14、f cookies means that Helens kitchen is crowded with many workers.Because the kitchen is crowded,each additional worker adds less to production,reflecting diminishing marginal product.Therefore,the production function is relatively flat.But now turn this logic around:When the kitchen is crowded,produ
15、cing an additional cookie requires a lot of additional labor and is thus very costly.Therefore,when the quantity produced is large,the total-cost curve is relatively steep.(Mankiw,third edition,p274)Costs of production may be divided into fixed costs and variable costs.Fixed costs are those costs th
16、at do not vary with the quantity of output produced.Variable costs are those costs that do vary with the quantity of output produced.Total costs Total Fixed costs(TFC)Total Variable costs(TVC)Total costs(TC)TC=TFC+TVC13.3.1 Fixed and Variable CostsTable 2 The Various Measures of Cost:ThirstyThelmas
17、Lemonade StandQuantity of Lemonade(glasses per hour)Total CostVariable CostAverage Fixed CostMarginal Cost0$3.00$3.00$0.00 -$0.300.50Fixed CostAverage Variable CostAverage Total Cost1 3.30 3.00 0.30$3.00$0.30$3.30 2 3.80 3.00 0.80 1.50 0.40 1.903 4.50 3.00 1.50 1.00 0.50 1.509 12.90 3.00 9.90 0.33 1
18、.10 1.4310 15.00 3.00 12.80 0.30 1.20 1.507 9.30 3.00 6.30 0.43 0.90 1.334 5.40 3.00 2.40 0.75 0.60 1.355 6.50 3.00 3.50 0.60 0.70 1.306 7.80 3.00 4.80 0.50 0.80 1.308 11.00 3.00 8.00 0.38 1.00 1.380.700.901.101.301.501.701.902.10 Average costs Average costs can be determined by dividing the firms c
19、osts by the quantity of output it produces.The average cost is the cost of each typical unit of product.13.3.2 Average and Marginal Costs Average costs Average Fixed costs(AFC)Average Variable costs(AVC)Average Total costs(ATC)ATC=AFC+AVC13.3.2 Average and Marginal CostsAverage Costs AFC=AVC=ATC=Fix
20、ed costQuantityFCQVariable costQuantityVCQTotal costQuantityTCQTable 2 The Various Measures of Cost:ThirstyThelmas Lemonade StandQuantity of Lemonade(glasses per hour)Total CostVariable CostAverage Fixed CostMarginal Cost0$3.00$3.00$0.00 -$0.300.50Fixed CostAverage Variable CostAverage Total Cost1 3
21、.30 3.00 0.30$3.00$0.30$3.30 2 3.80 3.00 0.80 1.50 0.40 1.903 4.50 3.00 1.50 1.00 0.50 1.509 12.90 3.00 9.90 0.33 1.10 1.4310 15.00 3.00 12.80 0.30 1.20 1.507 9.30 3.00 6.30 0.43 0.90 1.334 5.40 3.00 2.40 0.75 0.60 1.355 6.50 3.00 3.50 0.60 0.70 1.306 7.80 3.00 4.80 0.50 0.80 1.308 11.00 3.00 8.00 0
22、.38 1.00 1.380.700.901.101.301.501.701.902.10 Marginal costs Marginal costs(MC)measures the increases in total cost that arises from an extra unit of production.Marginal cost helps answer the following question:How much does it cost to produce an additional unit of output?13.3.2 Average and Marginal
23、 CostsMarginal Costs MC=(change in total cost)TCQ(change in quantity)Relationships Among Cost&Production Functions AP&AVC are inversely related.(ex:one input)AVC=(WL)/Q=W/(Q/L)=W/APL As APL rises,AVC falls MP and MC are inversely related MC=dTC/dQ=(WdL)/dQ=W/(dQ/dL)=W/MPL As MPL declines,MC risespro
24、d.functionscost functionsMPLLMCAP AVC(Figure 8.3 on page 358)QQcostMarginal Cost Thirsty Thelmas Lemonade StandQuantityTotalCostMarginalCostQuantityTotalCostMarginalCost0$3.0013.30$0.306$7.80$1.3023.800.5079.301.5034.500.70811.001.7045.400.90912.901.9056.501.101015.002.10Figure 4 Thirsty Thelmas Tot
25、al-Cost CurvesCopyright 2004 South-WesternTotal Cost$15.0014.0013.0012.0011.0010.009.008.007.006.005.004.003.002.001.00Quantityof Output(glasses of lemonade per hour)014327659810Total-cost curveHere the quantity of output produced(on the horizontal axis)is from the first column in Table 13-2,and the
26、 total cost(on the vertical axis)is from the second column.As the Figure 13-3,the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product.Total CostQuantity of Output(glasses of lemonade per hour)Total-Cost Curve1023454.002.006.008.0010.0012.0014.00$
27、15.00678910Figure 4 Thirty Thelmas Total-Cost CurvesFigure 5 Thirsty Thelmas Average-Cost and Marginal-Cost CurvesCopyright 2004 South-WesternCosts$3.503.253.002.752.502.252.001.751.501.251.000.750.500.25Quantityof Output(glasses of lemonade per hour)014327659810MCATCAVCAFCCostsQuantity of Output(gl
28、asses of lemonade per hour)1023451.000.501.502.002.503.003.50678910MCAVCATCAFCFigure 5 Thirsty Thelmas Average-Cost and Marginal-Cost CurvesFigure 5 Thirsty Thelmas Average-Cost and Marginal-Cost CurveThis figure shows the average total cost(ATC),average fixed cost(AFC),average variable curve(AVC),a
29、nd marginal cost(MC)for Thirsty Thelmas Lemonade Stand.All of these curves are obtained by graphing the data in Table 13-2.These cost curves show three features that are typical of many firms:(1)Marginal cost rises with the quantity of output.(2)The average-total-cost curve is U-shaped.(3)The margin
30、al-cost curve crosses the average-total-cost curve at the minimum of average total cost.Marginal cost rises with the amount of output produced.This reflects the property of diminishing marginal product.13.3.3 Cost Curves and Their ShapesCostsQuantity of Output(glasses of lemonade per hour)1023451.00
31、0.501.502.002.503.003.50678910MCFigure 5 Thirsty Thelmas Average-Cost and Marginal-Cost Curves The average total-cost curve is U-shaped.At very low levels of output average total cost is high because fixed cost is spread over only a few units.Average total cost declines as output increase.Average to
32、tal cost starts rising because average variable cost rises substantially.13.3.3 Cost Curves and Their Shapes The bottom of the U-shaped ATC curve occurs at the quantity that minimizes average total cost.This quantity is sometimes called the efficient scale of the firm.13.3.3 Cost Curves and Their Sh
33、apesCostsQuantity of Output(glasses of lemonade per hour)1023451.000.501.502.002.503.003.50678910ATCFigure 5 Thirsty Thelmas Average-Cost and Marginal-Cost Curves Relationship between Marginal cost and Average Total Cost.Whenever marginal cost is less than average total cost,average total cost is fa
34、lling.Whenever marginal cost is greater than average total cost,average total cost is rising.13.3.3 Cost Curves and Their Shapes Relationship between Marginal cost and Average Total Cost.The marginal-cost curve crossed the average-total-cost curve at the efficient scale.Efficient scale is the quanti
35、ty that minimizes average total cost.13.3.3 Cost Curves and Their ShapesCostsQuantity of Output(glasses of lemonade per hour)1023451.000.501.502.002.503.003.50678910MCATCFigure 5 Thirsty Thelmas Average-Cost and Marginal-Cost CurvesIt is now time to examine the relationships that exist between the d
36、ifferent measures of cost.13.3.4 Typical Cost CurvesQuantity of Lemonade(glasses per hour)Total CostVariable CostAverage Fixed CostMarginal Cost0$2.00$2.00$0.00 -$1.000.80Fixed CostAverage Variable CostAverage Total Cost1 3.00 2.00 1.00$2.00$1.00$3.00 2 3.80 2.00 1.80 1.00 0.90 1.903 4.40 2.00 2.40
37、0.67 0.80 1.479 8.80 2.00 6.80 0.22 0.76 0.9810 10.20 2.00 8.20 0.20 0.82 1.027 6.60 2.00 4.60 0.29 0.66 0.954 4.80 2.00 2.80 0.50 0.70 1.205 5.20 2.00 3.20 0.40 0.64 1.046 5.80 2.00 3.80 0.33 0.63 0.968 7.60 2.00 5.60 0.25 0.70 0.950.600.400.400.600.801.001.201.4011 11.80 2.00 9.80 0.18 0.89 1.0712
38、 13.60 2.00 11.60 0.17 0.97 1.1413 15.60 2.00 13.60 0.15 1.05 1.2014 17.80 2.00 15.80 0.14 1.13 1.271.601.802.002.20Big Bobs Cost CurvesFigure 6 Big Bobs Cost CurvesCopyright 2004 South-Western(a)Total-Cost Curve$18.0016.0014.0012.0010.008.006.004.00Quantity of Output(bagels per hour)TC42681412102.0
39、0TotalCost0(a)Total-Cost Curve$18.002.004.006.008.0010.0012.0014.0016.00Total Cost02461081214Quantity of Output(bagels per hour)TCFigure 6 Bib Bobs Cost CurvesFigure 6 Big Bobs Cost Curves(b)Marginal-and Average-Cost CurvesQuantity of Output(bagels per hour)Costs$3.002.502.001.501.000.5004268141210M
40、CATCAVCAFC(b)Marginal-and Average-Cost Curves0.501.001.50Costs2.002.50$3.0062481014120Quantity of Output(bagels per hour)AFCAVCATCMCFigure 6 Bib Bobs Cost CurvesFigure 6.Big Bobs Cost Curve.Many firms,like Big Bobs Bin,experience increasing marginal product before diminishing marginal product and,th
41、erefore,have cost curves shaped like those in this figure.Panel(a)shows how total cost(TC)depends on the quantity produced.Panel(b)shows how average total cost(ATC),average fixed cost(AFC),average variable curve(AVC),and marginal cost(MC)depends on the quantity produced.These curves are derived by g
42、raphing the data from the table.Notice that marginal cost and average variable cost fall for a while before starting to rise.13.3.4 Typical Cost Curves Three Important Properties of Cost Curves Marginal cost eventually rises with the quantity of output.The average-total-cost curve is U-shaped.The ma
43、rginal-cost curve crosses the average-total-cost curve at the minimum of average total cost13.4 Costs in the Short run and in the Long Run For many firms,the division of total costs between fixed and variable costs depends on the time horizon being considered.In the short run,some costs are fixed.In
44、 the long run,fixed costs become variable costs.Because many costs are fixed in the short run but variable in the long run,a firms long-run cost curves differ from its short-run cost curves.Figure 7 Average Total Cost in the Short and Long RunCopyright 2004 South-WesternQuantity ofCars per Day0Avera
45、geTotalCost1,200$12,000ATC in shortrun withsmall factoryATC in shortrun withmedium factoryATC in shortrun withlarge factoryATC in long runSources of Increasing Returns to ScalelThe sources of increasing output per unit of input when a firm grows include technical,managerial,purchasing,marketing and
46、financial economies.Economies and Diseconomies of Scale Economies of scale(increasing returns to scale)refer to the property whereby long-run average total cost falls as the quantity of output increases.Diseconomies of scale(decreasing returns to scale)refer to the property whereby long-run average
47、total cost rises as the quantity of output increases.Constant returns to scale refers to the property whereby long-run average total cost stays the same as the quantity of output increases.Figure 7 Average Total Cost in the Short and Long RunCopyright 2004 South-WesternQuantity ofCars per Day0Averag
48、eTotalCost1,200$12,0001,00010,000EconomiesofscaleATC in shortrun withsmall factoryATC in shortrun withmedium factoryATC in shortrun withlarge factoryATC in long runDiseconomiesofscaleConstantreturns toscaleBecause fixed costs are variable in the long run,the average-total-cost in the short run diffe
49、rs from the average-total-cost curve in the long run.Quantity of Cars per DayAverage Total CostATC in short run with small factory01,000$12,00010,0001,200ATC in short run with medium factoryATC in short run with large factoryConstant returns to scaleEconomies of scaleDiseconomies of scaleATC in long
50、 runFigure 7 Average Total Cost in the Short and Long RunsTermDefinitionMathematicalDescriptionExplicit costsCosts that require an outlay of money by thefirmImplicit costsCosts that do not require an outlay of money bythe firmFixed costsCosts that do not vary with the quantity ofoutput producedFCVar
