• Learning Objective:–Today I will be able to determine

when a firm shuts down by calculating total cost and marginal revenue.

• Agenda1. Learning Objective2. Lecture: Ch. 5.3 3. Worksheet4. Exit Slip

• Notes Title: Ch. 5.3 Production & Cost

• 2 Types of Cost– Fixed Cost: doesn’t change at short-run.– Variable Cost: labor b/c it varies at short-run &

varies w/ the amount produced.• Ex. Uhaul, if no workers hired, there is still a fixed cost

even if nothing is getting done. But, if workers are hired & give them different wages, then labor becomes variable cost.

Total Cost = Fixed Cost + Variable Cost

Marginal Cost– How Total Cost changes w/ output (Total Product)– Reflects changes of productivity of labor (variable resource)– In other words:

Marginal Cost = Change in Total Cost Change in Quantity

Ex. Total cost went from $200 when nothing was product (No Total Product) to $300 when Total Product increased to 2. Change in Total Cost is $100.Change in Quantity is 2.

$ 100 = $50 2Marginal Cost= $50

Check for Understanding

• What are the two types of cost???

• Why is labor considered a variable cost???

• What is the marginal cost formula????

• Marginal Cost Curve– At first slopes down b/c marginal returns• (Remember! Marginal returns is when you add labor &

you get more output/total product)

– Then slopes up b/c law of diminishing returns• (Remember! It’s when you add labor & you get more

output/total product, BUT, not that much) Ex.At 3 tons per/day, cost is $48.

After adding labor you move 9 tons per/day, cost is $25. (marginal returns)

After adding even more labor, 15 tons per/day, cost is $80. (law of Di. Re.)

• Marginal revenue – The benefit suppliers get from supplying an additional

unit.– Change in total revenue from selling 1more unit.• Ex. Week 1, student sell one box of chips, his revenue is $30.

Week 2, student sells two boxes of chip, his revenue is $60. The Marginal Revenue= $30, b/c his revenue changed by $30.

• If marginal revenue exceeds/equals marginal cost, producers will continue to sell additional units.

• Total revenue should cover at least variable cost-- if not, firm will SHUTDOWN.

TOTAL REVENUE

Variable Cost

Definitions:Marginal revenue– change of revenue after selling additional unit.

Marginal cost– change of cost after selling additional unit.

Example: Each box of chips is $10, in week two you sold one more unit (one more box), therefore, you had to pay $20. Change of cost $10 (Marginal Cost).Marginal revenue was $30.Marginal revenue covers marginal cost, therefore, we continue to sell more boxes.

Check for Understanding

• Why does marginal cost curve slope down? – Later, why does it slope up?

• What is marginal revenue?

• When do we decide to shutdown the firm?

• Shutdown Decision:– At short-run, better to shutdown below minimum

acceptable price (Marginal Revenue doesn’t cover Variable cost)• Minimum acceptable price: marginal revenue covers

variable cost***

– Still pay fixed cost• Going out of business there are no fixed cost.

• Competitive firm’s supply curve:– Upward sloping portion of supply curve.– Above the min. acceptable price.

Example:$33.33 is the min. acceptable price.

Supply curve slopes upward after $33.33, which is the competitive firm’s supply curve.

Check for Understanding

• At what price do firm’s decide to shut down??

• What cost must still be paid after the firm shuts down?

• When does the Competitive Firm’s Supply curve begin to slope upward???

Worksheet Time

Exit Slip• Your friend hooked up with Disneyland tickets, 5

tickets for $300. You decide to sell one ticket for $100. But, you want to make a little more money and you sell one more ticket.– What is marginal cost?– What is your marginal revenue?– If you decide make a business out of selling tickets.

Would you need shut down? Why or why not?

Note: Total cost is variable cost, in this example****

Title notes: Ch. 5.3 continued• Average cost = total cost output• Firm’s long-run cost

indicates lowest average cost of producing each output.

• Economies of scale– Firm increases; long-

average cost decreases.– b/c abor replaced by

capital

• Long-run average cost increases as production increases. diseconomies of scale

• Constant return to scale no increase/decrease of production & long-run average cost.

• Long-run average cost curve– Reflects economies to scale, diseconomies to

scale, & constant return to scale– Draw the graph.

• Firms plan for the long-run, but produce at short run.

• When marginal revenue = marginal cost, firms choose output.