businesses and their costs n.
Skip this Video
Loading SlideShow in 5 Seconds..
Businesses and Their Costs PowerPoint Presentation
Download Presentation
Businesses and Their Costs

Loading in 2 Seconds...

  share
play fullscreen
1 / 25
Download Presentation

Businesses and Their Costs - PowerPoint PPT Presentation

astro
99 Views
Download Presentation

Businesses and Their Costs

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. Businesses and Their Costs 6

  2. The Business Population • Plant • Factory, farm, mine, store, website, warehouse • Firm • Operates one or more plants • Industry • Group of firms that produce the same products LO1

  3. Corporation Advantages • Stocks • Ownership shares of a corporation • Bonds • Liabilities of a corporation • Limited liability LO1

  4. Principal-Agent Problem • Principals • Stockholders • Agents • Executives LO1

  5. Economic Costs The payment that must be made to obtain and retain the services of a resource Explicit costs Monetary payments Implicit costs Value of next best use Self-owned resources Includes normal profit LO2

  6. Accounting Profit and Normal Profit Accounting profit = Revenue – Explicit costs Economic profit = Accounting profit – Implicit costs Economic profit (to summarize) = Total revenue – Economic costs = Total revenue – Explicit costs – Implicit Costs LO2

  7. Economic Profit Economic profit Accounting profit Implicit costs (including a normal profit) Total Revenue Economic (Opportunity) Costs Explicit costs Accounting costs (explicit costs only) LO2

  8. Short Run and Long Run Short run Some variable inputs Fixed plant Long run All inputs are variable Variable plant Firms enter and exit LO3

  9. Short-Run Production Relationships Total product (TP) Marginal product (MP) Average product (AP) Change in total product = Marginal product Change in labor input Total product = Average product Units of labor LO3

  10. Law of Diminishing Returns Resources are of equal quality Technology is fixed Variable resources are added to fixed resources At some point, marginal product will fall Rationale LO3

  11. The Law of Diminishing Returns LO3

  12. The Law of Diminishing Returns 30 TP 20 Total Product, TP 10 0 1 2 3 4 5 6 7 8 9 Increasing Marginal Returns Negative Marginal Returns Diminishing Marginal Returns 20 Marginal Product, MP 10 AP 1 2 3 4 5 6 7 8 9 MP LO3

  13. Short-Run Production Costs Fixed costs (TFC) Costs do not vary with output Variable costs (TVC) Costs vary with output Total costs (TC) Sum of TFC and TVC TC = TFC + TVC LO4

  14. Per-Unit, or Average, Costs Average fixed costs AFC = TFC/Q Average variable costs AVC = TVC/Q Average total costs ATC = TC/Q Marginal costs MC = ΔTC/ΔQ LO4

  15. Short-Run Production Costs LO4

  16. Marginal Cost $200 150 100 Costs 50 0 10 1 2 3 4 5 6 7 8 9 Q MC AFC ATC AVC AVC AFC LO4

  17. Long-Run Production Costs The firm can change all input amounts, including plant size All costs are variable in the long run Long-run ATC Different short-run ATCs LO5

  18. Firm Size and Costs ATC-1 ATC-5 ATC-2 ATC-3 ATC-4 Average Total Costs Output LO5

  19. The Long-Run Cost Curve ATC-1 ATC-5 ATC-2 Long-run ATC ATC-4 ATC-3 Average Total Costs Output LO4

  20. Economies and Diseconomies of Scale Economies of scale Labor specialization Managerial specialization Efficient capital Other factors Constant returns to scale LO5

  21. Economies and Diseconomies of Scale Diseconomies of scale Control and coordination problems Communication problems Worker alienation Shirking LO5

  22. MES and Industry Structure Minimum efficient scale (MES): Lowest level of output where long-run average costs are minimized Can determine the structure of the industry LO5

  23. MES and Industry Structure Diseconomies of Scale Constant Returns to Scale Economies of Scale Average Total Costs Long-run ATC q1 q2 Output LO5

  24. MES and Industry Structure Economies of Scale Diseconomies of Scale Average Total Costs Long-run ATC Output LO5

  25. MES and Industry Structure Diseconomies of Scale Economies of Scale Average Total Costs Long-run ATC Output LO5