Lectures

Informal lecture notes.

Terminology

Economists, unlike accountants, will consider opportunity costs. Recall, that the opportunity cost is all that was given up for getting something.

One way to look at it would be to add explicit costs and implicit costs. Say Caroline is setting up a cookie factory and uses $300 of flour per day. In addition, Caroline had to give up her job as a professor where she earned $100 per day.

  • Implicit costs: $100

  • explicit costs: $300

Caroline’s total cost is $400 per day.’

Short-run

In the short-run, some costs are fixed. These are costs that do not vary with the quantity of output produced. That is the firm will pay fixed costs even when it produces nothing.

  • Variable costs: costs that change with the quantity of output produced

by the firm.

Production

Number of workers (L)
Output (Q)
Marginal product (MP)
Average product (AP)
0 0 NA NA
1 34 34 34.0
2 63 29 31.5
3 91 28 30.3
4 118 27 29.5
5 144 26 28.8
6 170 26 28.3

Costs

Output (Q)
Fixed (FC)
Variable (VC)
Total (TC)
Average fixed (AFC)
Average Variable (AVC)
Average total (ATC)
Marginal
0 3 0.00 3.00 NA NA NA NA
1 3 0.13 3.13 3.00 0.13 3.13 0.13
2 3 0.20 3.20 1.50 0.10 1.60 0.07
3 3 0.33 3.33 1.00 0.11 1.11 0.13
4 3 0.64 3.64 0.75 0.16 0.91 0.31
5 3 1.25 4.25 0.60 0.25 0.85 0.61
6 3 2.28 5.28 0.50 0.38 0.88 1.03
7 3 3.85 6.85 0.43 0.55 0.98 1.57
8 3 6.08 9.08 0.38 0.76 1.14 2.23
9 3 9.09 12.09 0.33 1.01 1.34 3.01
10 3 13.00 16.00 0.30 1.30 1.60 3.91

Formulas

  • Economic costs: explicit costs + implicit costs
  • Average product (AP): total product (Q) \(\div\) number of workers (L) = \(Q/L\)
  • Marginal product (MP): change in total product \(\div\) change in number of workers (\(\delta L\)) = \(\Delta Q/\Delta L\)
  • Total cost (TC): Fixed costs + Variable costs = \(FC + VC\)
  • Marginal cost (MC): change in total costs from a unit change in Quantity = \(\Delta TC/\Delta Q\)
  • Average fixed cost (AFC): Fixed costs \(\div\) Quantity = \(FC/Q\)
  • Average variable cost (AVC): Variable costs \(\div\) Quantity = \(VC/Q\)
  • Average Cost (AC): Total costs \(\div\) Quantity = \(TC/Q\)

Returns to Scale