the firm and cost overheads
DESCRIPTION
The Firm and Cost Overheads. Costs in the short run. Total cost. A firm’s total cost of production is the opportunity cost of the owners. — everything they must give up in order to produce output. Explicit and implicit costs. Explicit costs. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/1.jpg)
The Firm and Cost
Overheads
![Page 2: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/2.jpg)
Costs in the short runTotal cost
— everything they must give upin order to produce output
A firm’s total cost of production is theopportunity cost of the owners
![Page 3: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/3.jpg)
Explicit and implicit costs
Explicit costs
1. purchase of expendable inputs including labor time
2. purchase of capital services (usually rent or lease)
Implicit costs
1. value of produced expendables(feed for a cattle producer)
2. value of services provided by owned capital including financial capital
![Page 4: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/4.jpg)
Operating costs and allocated overhead
1. Costs of all expendables are often allocated to the generic group OPERATING COSTSOPERATING COSTS
2. All other costs are allocated to the group ALLOCATED OVERHEADALLOCATED OVERHEAD
![Page 5: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/5.jpg)
Data for the hay hauling problem
Cost of labor per hour = w1 = $6.00
Cost of tractor-wagon per hour = w2 = $20.00
![Page 6: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/6.jpg)
Total fixed cost (TFC)
The cost of all inputs that are fixedin the short run are called total fixed costs
Assume that wagons hours is fixed at 1
For this example, then TFC = $20.00
![Page 7: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/7.jpg)
Fixed Cost Curve
0
20
40
60
80
100
0 400 800 1200 1600 2000 2400
Co
st
Output - y
TFC
Graphical representation
![Page 8: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/8.jpg)
x1 x2 TPP APP A MPP MPP TFC TVC TC AFC AVC ATC AMC MC0.00 1.00 0.00 0.00 20.0 0.00 20.00
Data on hay hauling
1.0 1.0 38.0 38.00 38.00 74.0 20.0 6.00 26.00 0.526 0.158 0.684 0.158 0.081
2.0 1.0 144.0 72.00 106.00 136.0 20.0 12.00 32.00 0.139 0.083 0.222 0.057 0.044
3.0 1.0 306.0 102.00 162.00 186.0 20.0 18.00 38.00 0.065 0.059 0.124 0.037 0.032
Fixed cost stays the same -- variable cost is rising
![Page 9: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/9.jpg)
x1 x2 TPP APP A MPP MPP TFC TVC TC AFC AVC ATC AMC MC0.00 1.00 0.00 0.00 20.0 0.00 20.00
Data on hay hauling
1.0 1.0 38.0 38.00 38.00 74.0 20.0 6.00 26.00 0.526 0.158 0.684 0.158 0.081
2.0 1.0 144.0 72.00 106.00 136.0 20.0 12.00 32.00 0.139 0.083 0.222 0.057 0.044
3.0 1.0 306.0 102.00 162.00 186.0 20.0 18.00 38.00 0.065 0.059 0.124 0.037 0.0324.0 1.0 512.0 128.00 206.00 224.0 20.0 24.00 44.00 0.039 0.047 0.086 0.029 0.0275.0 1.0 750.0 150.00 238.00 250.0 20.0 30.00 50.00 0.027 0.040 0.067 0.025 0.0246.0 1.0 1008.0 168.00 258.00 264.0 20.0 36.00 56.00 0.020 0.036 0.056 0.023 0.0237.0 1.0 1274.0 182.00 266.00 266.0 20.0 42.00 62.00 0.016 0.033 0.049 0.023 0.0238.0 1.0 1536.0 192.00 262.00 256.0 20.0 48.00 68.00 0.013 0.031 0.044 0.023 0.0239.0 1.0 1782.0 198.00 246.00 234.0 20.0 54.00 74.00 0.011 0.030 0.042 0.024 0.02610.0 1.0 2000.0 200.00 218.0 200.0 20.0 60.00 80.0 0.010 0.030 0.040 0.028 0.03011.0 1.0 2178.0 198.00 178.0 154.0 20.0 66.00 86.0 0.009 0.030 0.039 0.034 0.03912.0 1.0 2304.0 192.00 126.0 96.0 20.0 72.00 92.0 0.009 0.031 0.040 0.048 0.06313.0 1.0 2366.0 182.00 62.0 26.0 20.0 78.00 98.0 0.008 0.033 0.041 0.097 0.23114.0 1.0 2352.0 168.00 -14.0 -56.0 20.0 84.00 104.0 0.009 0.036 0.044
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Total variable cost (TVC)
Remember that the cost of all the inputs that are variable
in the short run is called total variable cost
For our example TVC(38) = $6.00
TVC Σn1
i 1wixi
![Page 11: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/11.jpg)
And TVC (306) = $18.00
Data on hay hauling
x1 x2 TPP APP A MPP MPP TFC TVC TC AFC AVC ATC AMC MC0.00 1.00 0.00 0.00 20.0 0.00 20.00 1.0 1.0 38.0 38.00 38.00 74.0 20.0 6.00 26.00 0.526 0.158 0.684 0.158 0.0812.0 1.0 144.0 72.00 106.00 136.0 20.0 12.00 32.00 0.139 0.083 0.222 0.057 0.0443.0 1.0 306.0 102.00 162.00 186.0 20.0 18.00 38.00 0.065 0.059 0.124 0.037 0.032
![Page 12: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/12.jpg)
Data on hay haulingx1 x2 TPP APP A MPP MPP TFC TVC TC AFC AVC ATC AMC MC0.00 1.00 0.00 0.00 20.0 0.00 20.00 1.0 1.0 38.0 38.00 38.00 74.0 20.0 6.00 26.00 0.526 0.158 0.684 0.158 0.0812.0 1.0 144.0 72.00 106.00 136.0 20.0 12.00 32.00 0.139 0.083 0.222 0.057 0.0443.0 1.0 306.0 102.00 162.00 186.0 20.0 18.00 38.00 0.065 0.059 0.124 0.037 0.0324.0 1.0 512.0 128.00 206.00 224.0 20.0 24.00 44.00 0.039 0.047 0.086 0.029 0.0275.0 1.0 750.0 150.00 238.00 250.0 20.0 30.00 50.00 0.027 0.040 0.067 0.025 0.0246.0 1.0 1008.0 168.00 258.00 264.0 20.0 36.00 56.00 0.020 0.036 0.056 0.023 0.0237.0 1.0 1274.0 182.00 266.00 266.0 20.0 42.00 62.00 0.016 0.033 0.049 0.023 0.0238.0 1.0 1536.0 192.00 262.00 256.0 20.0 48.00 68.00 0.013 0.031 0.044 0.023 0.0239.0 1.0 1782.0 198.00 246.00 234.0 20.0 54.00 74.00 0.011 0.030 0.042 0.024 0.02610.0 1.0 2000.0 200.00 218.0 200.0 20.0 60.00 80.0 0.010 0.030 0.040 0.028 0.03011.0 1.0 2178.0 198.00 178.0 154.0 20.0 66.00 86.0 0.009 0.030 0.039 0.034 0.03912.0 1.0 2304.0 192.00 126.0 96.0 20.0 72.00 92.0 0.009 0.031 0.040 0.048 0.06313.0 1.0 2366.0 182.00 62.0 26.0 20.0 78.00 98.0 0.008 0.033 0.041 0.097 0.23114.0 1.0 2352.0 168.00 -14.0 -56.0 20.0 84.00 104.0 0.009 0.036 0.044
![Page 13: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/13.jpg)
Graphical representation of TVC
Total Variable Cost
0
20
40
60
80
100
0 400 800 1200 1600 2000 2400
Co
st
Output - y
TVC
![Page 14: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/14.jpg)
Total cost (TC)
The cost of all inputs used by the firm is called total costs
TC = TFC + TVC
TC Σn
i 1wixi
Specifically, the sum of fixed and variable costs is called total costs
![Page 15: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/15.jpg)
Cost function
C(y ,w , x̄ ) FC(x̄ , w) C(y , w)
![Page 16: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/16.jpg)
Graphical representation of total cost (TC)
Total Cost Curves
0
20
40
60
80
100
0 400 800 1200 1600 2000 2400
Co
st
Output - y
TFC
TVC
TC
![Page 17: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/17.jpg)
Average cost (AC)
Average cost is just a total cost figure divided by theassociated output level
AC represents the average per unit costof a given level of output
There are average costs associated with eachlevel of total costs
![Page 18: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/18.jpg)
Average fixed cost is given by
AFC FCy
TFCy
Average variable cost is given by
AVC VCy
TVCy
Average (total) cost is given by
ATC AC TCy
Cy
![Page 19: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/19.jpg)
Data on hay haulingx1 x2 TPP(y) APP A MPP MPP TFC TVC TC AFC AVC ATC AMC MC0.00 1.00 0.00 0.00 20.0 0.00 20.00 1.0 1.0 38.0 38.00 38.00 74.00 20.0 6.00 26.00 0.526 0.158 0.684 0.158 0.0812.0 1.0 144 72.00 106.0 136.0 20.0 12.0 32.0 0.139 0.083 0.222 0.057 0.0443.0 1.0 306.0 102.00 162.00 186.00 20.0 18.00 38.00 0.065 0.059 0.124 0.037 0.0324.0 1.0 512.0 128.00 206.00 224.00 20.0 24.00 44.00 0.039 0.047 0.086 0.029 0.0275.0 1.0 750.0 150.00 238.00 250.00 20.0 30.00 50.00 0.027 0.040 0.067 0.025 0.0246.0 1.0 1008.0 168.00 258.00 264.00 20.0 36.00 56.00 0.020 0.036 0.056 0.023 0.0237.0 1.0 1274.0 182.00 266.00 266.00 20.0 42.00 62.00 0.016 0.033 0.049 0.023 0.0238.0 1.0 1536.0 192.00 262.00 256.00 20.0 48.00 68.00 0.013 0.031 0.044 0.023 0.0239.0 1.0 1782.0 198.00 246.00 234.00 20.0 54.00 74.00 0.011 0.030 0.042 0.024 0.02610.0 1.0 2000.0 200.00 218.0 200.00 20.0 60.00 80.0 0.010 0.030 0.040 0.028 0.03011.0 1.0 2178.0 198.00 178.0 154.00 20.0 66.00 86.0 0.009 0.030 0.039 0.034 0.03912.0 1.0 2304.0 192.00 126.0 96.00 20.0 72.00 92.0 0.009 0.031 0.040 0.048 0.06313.0 1.0 2366.0 182.00 62.0 26.00 20.0 78.00 98.0 0.008 0.033 0.041 0.097 0.23114.0 1.0 2352.0 168.00 -14.0 -56.00 20.0 84.00 104.0 0.009 0.036 0.044
AFC 20144
.1388 ATC 32144
.2222
![Page 20: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/20.jpg)
Average Fixed Cost
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0 400 800 1200 1600 2000 2400
Co
st
Output - y
AFC
![Page 21: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/21.jpg)
AVC
Average Variable Cost
0.00
0.05
0.10
0.15
0.20
0 400 800 1200 1600 2000 2400
Co
st
Output - y
![Page 22: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/22.jpg)
Note that ATC = AVC + AFC
Average Cost Curves
0.00
0.10
0.20
0.30
0.40
0 400 800 1200 1600 2000 2400
Co
st
Output - y
AVC
ATC
AFC
![Page 23: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/23.jpg)
Marginal costMarginal cost is the increment, or addition, to costMarginal cost is the increment, or addition, to costthat results from producing one more unit of outputthat results from producing one more unit of output
The increase in total cost is the increase in variable cost
In discrete or average terms marginal cost is given by
MC ΔC(y,w)Δy
ΔTC(y,w)Δy
![Page 24: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/24.jpg)
Marginal cost is just the derivative of the cost function with respect to y
MC dC(y,w)dy
![Page 25: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/25.jpg)
Example calculation
MC ΔC(y,w)Δy
x1 x2 y TFC TVC TC AVE MC0.0 1.0 0.0 20.0 0.00 20.00 1.0 1.0 38.0 20.0 6.00 26.00 0.1582.0 1.0 144.0 20.0 12.00 32.00 0.0573.0 1.0 306.0 20.0 18.00 38.00 0.0374.0 1.0 512.0 20.0 24.00 44.00 0.0295.0 1.0 750.0 20.0 30.00 50.00 0.0256.0 1.0 1008.0 20.0 36.00 56.00 0.023
(38 32)(306 144)
6162
0.037
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Graphical representation of Marginal Cost
0.00
0.05
0.10
0.15
0.20
0 400 800 1200 1600 2000 2400
Co
st
Output - y
AVE MC
![Page 27: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/27.jpg)
Relationship between MC & MPP (1 variable input)
When MPP rises, MC falls
When MPP falls, MC rises
Marginal Cost Curve
0.00
0.05
0.10
0.15
0.20
0 400 800 1200 1600 2000 2400
Co
st
Output - y
AVE MC
Marginal Product of Input 1
-50
0
50
100
150
200
250
300
2 4 6 8 10 12 14
Input - x1
Ou
tpu
t -
y
MPP 1
![Page 28: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/28.jpg)
4. The marginal cost curve will intersect AVCand ATC at their minimum points
Average and marginal costs1. When marginal cost is below the average cost, the average cost curve is falling
2. When the marginal and average costs are equal,the average cost curve does not change(is at minimum point)
3. When the marginal cost is greater thanaverage cost, average cost is rising
![Page 29: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/29.jpg)
Average and Marginal Cost Curves
0.0
0.1
0.2
0.3
0 400 800 1200 1600 2000 2400
Co
st
Output - y
AVC
ATC
AVE MC
AFC
![Page 30: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/30.jpg)
FC
Cost curves for alternative functionC(y) 100 6y .4y 2 .02y 3
050100150200250300350400450500
0 10 20 30 40
Output - y
Co
st
VC
TC
![Page 31: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/31.jpg)
AVCATC
AFC
Average and Marginal Cost Curves
0481216202428323640
0 10 20 30
Output - y
Co
st
AMC
![Page 32: The Firm and Cost Overheads](https://reader033.vdocuments.mx/reader033/viewer/2022051218/568158c0550346895dc60a38/html5/thumbnails/32.jpg)
The End