Economics with cornè

• Economic cost / opportunity cost


  Costs exist because resources are scarce, productive and have alternative uses. When society (or firms) uses a combination of resources to produce a particular product, it forgoes all alternative opportunities to use those resources for other purposes.
• Explicit costs


  The monetary payments (or cash expenditures) a firm makes to those who supply labour services, materials, fuel, transportation services etc.
• Implicit costs


  Opportunity costs of using self-owned, self-employed resources. To the firm, implicit costs are the money payments that self-employed resources could have earned in their best alternative use.
• Examples of implicit and explicit costs


  • For attending University, what are some explicit and implicit costs?
• Normal profit


  The payment made by a firm to obtain and retain entrepreneurial ability, or the minimum income entrepreneurs must receive to induce it to perform those functions for a firm.
• Economic or pure profit


  Total revenue minus total costs (both explicit and implicit, the latter including normal profit to the entrepreneur).
• Short run


  Period too brief for a firm to alter its plant capacity (i.e. the size of the factory/ offices/ production facility), yet long enough to permit a change in the degree to which the fixed plant is used.
• Long run


  Period long enough for the firm to adjust the quantities of all the resources that it employs, including plant capacity.
• Spar employing 10 extra workers for one of its branches. Adding an extra branch in the Rondebosch area.


  • Do these adjustments refer to the short- or the long-run?
• Economic profit


  Accounting profit
• Total product (TP)


  Total quantity or total output of a particular good or service produced.
• Marginal product (MP)


  The extra output or added product associated with adding a unit of a variable resource to the production process. MP= ΔΤP/ Δinput
• Average product (AP)


  Output per unit of input. AP= TP/input
• Law of diminishing returns


  • As successive units of a variable resource are added to a fixed resource, beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource decline.
• Assumption: Technology is fixed.
• Fixed costs (FC)


  Costs that in total do not vary with changes in output. They are associated with the firm's existence and have to be paid even if its output is zero.
• Variable costs (VC)


  Costs that change with the level of output. They are associated with payments for inputs to the production process.
• Total costs (TC)


  Sum of fixed cost and variable cost at each level of output TC=TFC+TVC
• Average fixed cost (AFC)


  It is calculated by dividing total fixed cost (TFC) by each level of output AFC=TFC/Q
• Average variable cost (AVC)


  It is calculated by dividing total variable cost (TVC) by each level of output AVC=TVC/Q
• Average total cost (ATC)


  It is calculated by dividing total (TFC) by each level of output ATC=TC/Q. Also, ATC = TC/Q = (TFC+TVC)/Q= TFC/Q +TVC/Q = AFC+AVC
• Marginal cost (MC)


  Extra cost of producing 1 more unit of output MC= ΔΤC / ΔQ
• A firm has fixed costs R60 and variable costs as in the table. Complete the table below.


  • TP, TFC, TVC, TC, AFC, AVC, ATC, MC
• Total cost data and Average & Marginal cost data
• Short-run production costs


  • TP
  • TFC
  • TVC
  • TC
  • AFC
  • AVC
  • ATC
  • MC
• Total cost data
• Average & Marginal cost data
• A firm has fixed costs R60 and variable costs as in the table. Complete the table below.
• Costs


  • TP
  • TFC
  • TVC
  • TC
  • AFC
  • AVC
  • ATC
  • MC
• Short-run production costs
• Average product and Marginal product
• Production curves
• Cost curves
• Long-run production costs


  • In the long run, an industry and individual firms can undertake all desired resource adjustments: they can change all amounts of inputs used
  • Enough time for new firms to enter and old firms to leave an industry
  • Analysis only in ATC: no distinction between AVC and AFC since all costs are variable
• Firm size and costs


  • A single plant manufacturer may start on a small scale and due to successful operations, may expand to successively larger plant sizes with larger output capacities
  • Larger plants will lower ATC but eventually a still larger plant may cause ATC to rise
• Long-run production costs
• Long-run cost curve


  • Vertical lines perpendicular to the output axis indicate the level of output at which the firm should change plant size to realize the lowest attainable ATC
  • Long-run ATC is made up of segments of short-run ATC curves for the various plant sizes
  • Long-run ATC shows the lowest ATC at which any output level can be produced after the firm has time to make appropriate adjustments
• Returns to scale
• Economies of scale


  They explain the down-sloping part of long-run ATC: as plant increases, a number of factors will for a time lead to lower average costs of production: labour specialization, managerial specialization, efficient capital, and others
• Diseconomies of scale


  They explain the up-sloping part of long-run ATC: as plant keeps increasing average costs of production will increase due to difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer