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Chapter 22

Chapter 22. Supply: The Costs of Doing Business Sections 1 and 2. FIRMS AND PRODUCTION. The relationship between output and resources Supply is the quantities of output that sellers are willing and able to offer for sale at every price

melyssa-jennings
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Chapter 22

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  1. Chapter 22 Supply: The Costs of Doing Business Sections 1 and 2

  2. FIRMS AND PRODUCTION • The relationship between output and resources • Supply is the quantities of output that sellers are willing and able to offer for sale at every price • To determine how much to supply at any given price, sellers must know how much it costs to supply each quantity • The relationship between output and costs depends on the relationship between output and the resources used to create that output

  3. FIRMS AND PRODUCTIONS

  4. FIRMS AND PRODUCTION • On the previous chart, we notice that as we add employees, we gain output at different amounts. • Adding one employee yields us 30 additional units • Adding another employee yields us an additional 35 units • Adding another employee yields us an additional 35 units. • What do we notice occurring after we add a 4th employee? A 5th? 6th? 7th? 8th? • What possible reason can you come up with to explain this?

  5. FIRMS AND PRODUCTION • The relationship between employees and output is called the LAW OF DIMINISHING RETURNS • Too many employees in an area at one time will cause them to be inefficient—they simply start to get in each other’s way. • Law of Diminishing Returns • When successive equal amounts of a variable resource are combined with a fixed amount of another resource, marginal increases in output that can be attributed to each additional unit of the variable resource will eventually decline

  6. FROM PRODUCTION TO COSTS

  7. FROM PRODUCTION TO COSTS We are most interested in the relationship between output and costs because we want to know the costs of supplying output—so, we need to convert the table on the previous slide into one that shows this relationship

  8. FROM PRODUCTION TO COSTS

  9. FROM PRODUCTION TO COSTS • We added a new column to the last table—average total cost (ATC) • ATC is the per unit cost, derived by dividing total costs by the quantity of output

  10. FROM PRODUCTION TO COSTS • Marginal cost • ATC is calculated by dividing the total cost by the output. ATC is the per unit cost of output. • Marginal Cost (MC) is the additional cost of supplying another additional unit of output • Marginal Cost is calculated by dividing the change in total cost by the change in output • For example, a change in output of 0 to 30 units on our last table costs us $1000. Therefore, $1000/30=$33.33 for our MC

  11. FROM PRODUCION TO COSTS • If the MC < ATC, the ATC is falling • If the MC > ATC, the ATC is rising • Definition of Costs • Total Costs (TC) • The expenses that a business has in supplying goods and/or services • Total Fixed Costs (TFC) • Payments to resources whose quantities cannot be changed during a fixed period of time—the short run • Total Variable Costs (TVC) • Payments for additional resources used as output increases • Average Fixed Costs (AFC) • The total fixed cost divided by total output

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