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Okay, everybody less scarce started.
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professor trainees out-of-town today so our replace him talking about production
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cost today...think this stuff is so boring that you want me to
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teach it but it's very important...sense first-aid
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describe the firm's behavior so when you think of how for make choice in
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the whole economy you have to think about
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...production cost the second sense is this part of material is a little bit
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mass intensive compared to other lecture but it
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is always almost surely will show up on the exam so
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make sure you pay for attention today okay so let's begin.
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We thinking of the production cause we
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...divided two-part the first part is a fixed cost so what is a
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fixed...he just does not depend on the quantity of output
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...thinking of we're having a car factory.
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to produce car you have to buy land for the factory you have to
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set up the machines and the production lines and all this money spend
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...depend on how many cars you...you produce right so this part of
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cost usually...calculate of fixed cost.
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And, the other part of cost we called variable cost
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because it will challenge as you produce more...as you produce
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more so come back to the curve factory example if you want to produce
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small car you have to buy more parts you have to hire.
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More workers you have...more truckers...transport all the
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new car productive right so as you produce more you have
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...spend more money to produces on the material
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...are the input?
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So, that's variable cost.
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So, then the final equation is purely ...since that
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the total cost is adding fixed costs in the variety of cost together.
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So, everyone is clear with...ok.
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So, now let's come let's see a numerical example so in the car
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factor example for all the fixed cost like the
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land the machine is nine thousand.
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And, the variety will costs is if you don't produce
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anything you don't need to buy any parse...workers so the rabble cost
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is zero if the quantities zero.
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But, if you produce one car you have to
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high somebody to work so these costs...a thousand-dollar.
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And, if you produce two cars you have to
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buy more parse and maybe the workers have to work longer I have more workers on
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...cost goes up okay so the total
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...just purely the sum of this...
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So, if we draw this on the diagram
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would was see so first we draw the total cost
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...so basically the last column.
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I should have the so we basically just draw
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...column in a diagram and was...
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First total cost...at the level of output arises right this
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is the basic intuition as we produce small
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...probably the causes higher
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and this part which is means you have to spend is cost even when you're
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...zero so this part capture the fixed cost part.
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Okay, so, sorry here's this to more line about the total
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cost so this says total cost
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is minimum cost of producing the output it just means you know,
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it's not the firm's
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...to something are the workers are not have a
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...little high-wage or something so it's just the total cost is already
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the producer trying hardest to minimum the cost already so
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if you want the firm give you two cars you have at least?
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To cover their cost so
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this participates minimum cost repeat producing the output.
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And, total cost includes a reasonable profit so here
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this profit most means if you think and often normal return of
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investment.
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...of...if ...if I put the money in the bank I'll have a five
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percent interest rate...in that sense the money
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...invest in the factory car
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fractured also give me five percent of return so that means that could
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...acid total cost...money are barred from bank is also
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cost so here is the total cost.
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A very related concept and also
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important these average cost.
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It's very simple to calculate it it's basically just you divide the total cost by the
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quantity tells you on each
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of unit of the output how much the cost is.
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So, here.
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Back to...numbers you
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...see that ac column is
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just total cost divided by the quantity rate.
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So, if you draw the average cost.
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On a curve what
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...you'll find now it has a u shape here so why doesn't
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...u shape.
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Anyone get a new idea.
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Yeah, exactly so why the average cost
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decrease.
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In thewhen you increase output?
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Because the fixed...what average our...so if you only
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produce one car you have to pay all the machine or the production line
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prefer produce to all ten then on each of the car the
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part the average fixed cost is only a half or tenth
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...so because usually the fixed cost pretty large
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...the quantity increase the average cost decrease.
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That's because of the fixed cost
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...average out among larger quantity
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...why this part is increasing.
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Yeah, so, as you increase you being so quantity
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it especially not high-level than the variable costs my dominant the whole cost
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park right like you buy all the mature you can get in united
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states and you have to import some other steal from other country and all the
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transportation costs may be really high to-you so then this part
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increase just means ask the resource...more
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scares then the variable costs might increase.
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As a corny goes up...drugs the average cost
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...okay yes question.
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Yeah, it has actually so when you think of
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the economy to the skills so it's basically
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half the decreasing level it means asses...larger
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...gets...on economy wise right and this is decreasing?
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Ok,
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so, now we come to a concept which can distinguish people who don't take
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...one right so marginal cost is has a similar flavor as
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the marginal will is to pay...marginal cost is thinking
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of if we forget whatever we put the money on the factory if
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we produce one extra unit how much money we how much
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what is the cost?
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So, maybe it's easier use these numbers right so if
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...so the marginal cost forget about the average cost
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is always come from the total cost so what happens is if you produce
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zero it's everything is zero you don't calculat marginal cost.
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So, if you if you thinking about the first unit so.
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Fixed causes nine thousand and...produce one unit the total cost
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is ten thousand so the extra money you spend
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producing from zero to one is only one thousand right.
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And, similarly if we check in the second unit you...
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okay we already have the machine we already have the factually and
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we already produce the first unit now I'm thinking of whether I should
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produces second unit so the extra money to produce
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a second unit is two thousand right because it cost you
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them much produce one unit...cost totally them much for you to produce
00:10:01.910
to units of the difference tells you the actual extra cost for producing
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one extra unit alright so if you do this.
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Deduction everywhere you all get this marginal cost.
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So, if we draw this on a diagram.
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Was see.
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Its increasing.
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Rise...is increasing
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needs exactly the reason what are we talking about the increase in average cost
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the marginal cost of producing one more car.
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Is more costly because the resources case year
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...less workers to be hired in the local cd?
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the parts price my go up if I produce more if I.
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Yeah, so,
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that's why the marginal cost curve have increase.
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Slope.
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So, here we said is four high-output because when you in
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...high enough output.
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The resource guests scarcity of resource might kick in but thinking know
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for low high-output output what would you guess about the
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marginal cost curve instead of its steeply increasing.
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What would it be will be flatter?
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And, you might even decrease rate.
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Think of the beginning of the production.
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...so here, yeah, that's
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actually very good point so here the marginal cost has nothing to do with
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a fixed costs rate why because the fixed causes nine thousand
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...never change with output so here the question we're thinking
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is what is actual costs of extra unit right so the assumptions
00:12:02.350
you righty produce something or you're ready to produce something so
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the nice thousand actually is not anywhere in the marginal cost so
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when you think of the marginal cost you should separated from
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...fixed costs should be...
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So, come back to this my question then when you think
00:12:25.870
enough the beginning of the marginal cost curve it it's not because for the
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fixed cost...right because the marginal cost even doesn't have the component of fixed cost?
00:12:38.310
So, what might be the reason?
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Return to scale right so more specifically
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might be learning by doing right so the workers produce...first
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...has to have all the special knowledge but when he produces second
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car he already had the knowledge and he's most skillful at producing cars so the
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...fewer hours for him to produce a car right so here is like when
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you just produce a small quantity the scarcity of resource has
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...or your marginal cost
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yet but other knowledge.
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The curves not exactly I mean corresponding to
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these numbers right so here is probably more linear of flatter here
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...just I probably just...the last trade these increasing
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actually if you go to the real word and you will think its marginal cost curve
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...something flatter like this and he's
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...have a little bit decrease in the beginning us that's what we call return to scale
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okay so, yeah, here is just tell you the trend is increasing.
00:14:01.950
Ok, now comes to the hard part.
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So, here if we draw the average cost
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...marginal cost together what do we will find.
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So,...define...usually the average cost is
00:14:16.240
the higher than the marginal costs in the beginning.
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What's the reason for this part.
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Fixed costs rate yet because in the average cost you
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calculated fixed cost but in marginal
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cost you exclude up hard so in the first the every
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...really hide to produce the first two cars because it has to
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...for all the machine and the lend e.
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...expensive that right so the so the average cost you
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really higher than the marginal cost in the beginning of the production.
00:15:02.330
Then as time goes on because the marginal cost is
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a lower than the average cost.
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The extra unit you produce.
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That each...moving average idea right so the extra unit
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you produce the marginal cost is smaller than the average cost so you
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...up and do an average again than the average...goes down right?
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This...sense.
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Any question on that so this is very important I want everybody knows that.
00:15:39.100
So, when marginal cost is lower?
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Than the average cost.
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Then...quantity goes up
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the average cost decrees...the marginal cost thinking of
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...smaller than the average number the new...average again so all the average
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...goes down okay so once the marginal cost.
00:16:02.510
Exceed the average cost.
00:16:07.490
Then the marginal the increasing of the marginal costs were drag up
00:16:12.510
to averaging cost...for extra units you produce
00:16:17.270
the marginal cost is higher than the covered currents average then you take
00:16:24.090
an average again so the final average well, be higher.
00:16:28.670
So, after if the marginal cost is the higher than average
00:16:41.850
costs than the...average because will have a increasing trend.
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Not necessarily right so because one produced decide how
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what's the quantity produced he compare the average of the marginal cost and the price
00:16:56.760
right because if he sell one unit he can get the price of the product suppose
00:17:00.900
is fixed so if the price is really low...
00:17:04.550
And, forget about the fixed cost fixed size already done
00:17:10.600
...then...are produce only these quantity right so here is telling,
00:17:13.080
telling you what's the social optimal
00:17:18.440
off this economy of this car factory economy is
00:17:23.400
...production until here.
00:17:24.460
Where the minimum?
00:17:32.540
Minimum off the average...interact within marginal cost.
00:17:33.420
Okay,
00:17:39.630
so, it does not meaning the firm has to produce q zero
00:17:44.580
...my produce here it depends on the price of the product.
00:17:48.300
But, here I just wanted-to tell you the relationship between the average
00:17:52.390
cost and the marginal cost and you have to remember that.
00:17:54.710
The average cost have a u shape.
00:17:59.570
And, the interrupt when you draw a diagram on
00:18:04.720
exam and homework you...remember to make sure that the diagram you dries
00:18:08.250
writes I was see whether the lowest point of the
00:18:18.070
average occur cost curves interact with the marginal cost curve okay.
00:18:23.220
Ok, so, let's move on.
00:18:24.220
Yeah, so, here
00:18:29.040
...what I'm saying so one the marginal cost is lower
00:18:33.970
the average cost will be decreasing and when marginal
00:18:39.120
cost is the higher the average costs were increasing?
00:18:41.710
So, now how do link.
00:18:46.700
concept of average cost marginal cost with the total cost.
00:18:52.080
So, how do we represent the total costs in the graphs?
00:18:56.930
So, the marginal cost tells you.
00:18:59.440
The x troll.
00:19:03.670
Cost of producing one unit right it does not have the fixed cost so
00:19:08.470
here the graph tell you if you want to know what's the total cost.
00:19:14.750
Of producing one unit of producti it should be the area.
00:19:17.610
Under the marginal cost.
00:19:22.510
Plus the...right.
00:19:29.220
So, basically the area or here tells you the variety of cost.
00:19:34.850
And, then the total cost equals...cost plus variable costs.
00:19:38.160
So, if we change.
00:19:43.520
To quantity to the marginal cost of the first unit is here the marginal cost of the second
00:19:48.790
unit here so you have to add them together so this is like
00:19:52.540
...integral idea right and also you still have to remember
00:19:57.230
...the fixed cost part so that so fixed cost plus.
00:20:06.960
The total...here gives you the total cost of repute produce to...
00:20:11.650
here is a general quantity that is still the same
00:20:16.000
idea this whole...you add you basically
00:20:20.620
add the marginal cost of each unit here and then.
00:20:25.860
At the fixed cost give you the total cost.
00:20:27.580
So, here.
00:20:30.390
So, how do we think of the change
00:20:31.880
in total cost producing?
00:20:37.450
Compared to qtwo.
00:20:38.860
So, the fixed cost of
00:20:43.560
...to...are the same right the fixed cost just means you have to set
00:20:47.510
up the machine and then this part
00:20:53.880
gives you the change of the total cost right so the extra money you have to
00:20:58.430
spend in producing code qtwo in addition to qone is a
00:21:04.190
marginal cost of producing one more unit from qone and,
00:21:08.600
another unit other than that so basically you add all the this part of
00:21:15.880
margin called together...give you the total cost change of the two quantities right.
00:21:19.350
And, this part when you're talking about the total cost change
00:21:22.650
it's only the integral here right no
00:21:34.010
...anymore because the fixed cost cancel out.
00:21:42.730
So, now how do we represent the total costs in the average cost curve?
00:21:49.930
...has an idea what is a formula how do we calculate the average cost.
00:21:54.640
Yes, total cost divided by q so if we know the average cost of the
00:21:59.380
simple way to get total got causes average cost...q right
00:22:05.770
so here if I tell you the quantity of...production is here.
00:22:08.550
The total cost of producing
00:22:12.030
q zero is just ac multiplier qone.
00:22:15.230
So, mathematically it just the area
00:22:20.020
of this rectangle right so here is not integral anymore because
00:22:23.770
what we know that the total cost is just the productive
00:22:27.210
of average costs in the quantity so it is always.
00:22:37.500
The area of the rectangle here.
00:22:39.710
Yeah, so, that's.
00:22:42.620
What we call about total cost?
00:22:48.530
And, the average cost marginal cost so the last point
00:22:53.290
Is thinking about the production decision right?
00:22:55.900
So, if we think enough how much
00:23:02.590
quality those the society should have the output like think
00:23:07.050
about how many cars should we have we have from the consumers
00:23:10.440
side that's...is to pay right.
00:23:13.490
And, we should check the marginal, marginal
00:23:18.520
in this space suppose we already have a thousand car in the...should...the
00:23:23.100
...one and the consumer want to spend two thousand
00:23:28.010
...the to twenty thousand for the car so...the...
00:23:32.310
right and from the supply from the firm's side is
00:23:36.520
...marginal cost...it already produces...car should
00:23:40.560
...produce another extra car it...the
00:23:45.760
company so-and-so to produce one...marginal cost so we should
00:23:50.440
have a...one car if the social
00:23:55.140
...to pays a higher than the marginal cost right it's
00:23:59.680
more beneficial to the society...producing one more
00:24:04.490
cars lower than the marginal is to pay soon another way.
00:24:09.480
The society or the firm should expend the production until the marginal
00:24:14.220
...inness to pay to the marginal cost rate.
00:24:17.870
So, this is from a social optimum side.
00:24:24.270
Just one extra point how do we think of you who only consider the firm's side.
00:24:27.720
How much cars should the firm produce?
00:24:32.780
If you using the marginal cost concept.
00:24:36.370
So, the firm...the goal is maximum the due
00:24:40.540
to approach profit right so how to make a profit
00:24:42.210
...the prize.
00:24:44.880
The consumer pay is a higher than
00:24:49.420
across right so firm does not compare the marginal
00:24:52.520
...nonenes reform considerable the marginal is
00:24:55.670
...he think about what surprise of the car is
00:25:01.110
a profit profitable to produce one more car so firms compare
00:25:05.240
p instead of marginal...to pay.
00:25:08.490
Csp is a higher than the marginal cost than the from
00:25:13.340
were continue to produce rate but hopefully we hope
00:25:18.130
the whole economy is well function in the sense that the demand
00:25:23.470
curve reflects the marginal woman's two-page so the price equalize
00:25:26.930
...to pay then whatever the final
00:25:30.760
production decision is also the social optimal.
00:25:32.970
...just one
00:25:39.110
extra point so that's actually I.
00:25:43.500
...supposed to teach you today so thank you...know if you have
00:25:45.040
...question.
00:25:45.460
Ok.

Video OCR Contents
Time
Texts
Costs of Production
Costs of Production Fixed cost Cost of setting up operations = Costs that do not vary with output.
Cos& of Production Fixed cost = Cost of setting up operations = that do not vary with output. Variable Cost = Costs that vary with output
of Production Fixed cost = Cost of setting up operations = Costs that do not vary with output. Variable Cost = Costs that vary with output Total Cost = Fixed Cost + Variable Cost
Example: q o 1 2 3 4 FC 9,000 9,000 9,000 9,000 9,000 1,000 3,000 6,000 11,000 TC 9,000 10,000 12,000 15,000 20,000
TC = total cost of producing output TC rises as the level of outputrises. TC
Example: q o 2 3 4 FC 9,000 9,000 9,000 9,000 9,000 vc 1,000 3,000 6,000 11,000 TC 9,000 10,000 12,000 15,000 20,000
TC = total cost of producing output TC rises as the level of outputrises. TC
TC = total cost of producing output TC rises as the level of outputrises. TC is the minimum costof producing the output TC
TC = total cost of producing output TC rises as the level of output rises. TC is the minimum cost of producing the output TC includes a reasonable profit TC
AC = Average Cost per unit = TCIq
Example: q 2 3 4 5 6 TC 9,000 10,000 12,000 15,000 20,000 27,500 36,000 10,000 6,000 5,000 5,000 5,250 6,000
AC is usually
AC is usually AC
AC is usually
AC is usually AC
AC is usually
AC is usually bowl-ehQed.
AC is usually AC
AC is usually bowl-shaped. AC
AC is usually
MC = Marginal Cost = extra cost of producing one extra unit
Example: q 2 3 4 5 6 9,000 10,000 12,000 15,000 20,000 27,500 36,000 AC 10,000 6,000 5,000 5,000 5,250 6,000 MC -1,000 2,000 3,000 5,000 7,500 8.500
MC usually rises with output (for high enough output levels). MC
Example: q 2 3 4 5 6 TC 9,000 10,000 12,000 15,000 20,000 27,500 36,000 AC 10,000 6,000 5,000 5,000 5,250 6,000 MC -1,000 2,000 3,000 5,000 7,500 8,500
MC usually rises with output (for high enough output levels). MC
Example: q 2 3 4 5 6 9,000 10,000 12,000 15,000 20,000 27,500 36.000 AC 10,000 6,000 5,000 5,000 5,250 6,000 MC -1,000 2,000 3,000 5,000 7,500 8.500
MC usually rises with output (for high enough output levels). MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC AC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC AC
MC = AC at minimum of AC MC
MC = AC at minimumof AC MC
MC = AC at minimum of AC MC
MC < AC when AC is falling. MC
MC > AC when AC is rising. MC
How to representtotal costs on our graphs of MC and AC ?
TC = plus area under MC
Change in TC from Q, to Q2 = Area under MC between Q, and Q2 MC Q,
Change in TC from QI to Q2 Area under MC between Q, and Q2 MC
Change in TC from Q, to Q2 = Area under MC between Q, and Q2 MC Q,
TC = AC times q AC
TC = AC times q
TC = AC times q AC
TC = AC times q
TC = AC times q
TC = AC times q AC
TC = AC times q
TC = AC times q
TC = AC times q
Social Optimum: - Produce an extra unit whenever MWTP > MC - Stated Expand production until MWTP= MC
TC = AC times q
Social upumum: - Produce an extra unit whenever MWTP > MC - Stated Expand production until MC
Social Optimum: - Produce an extra unit whenever MWTP MC - Stated alternatively: Expand production until MWTP= MC

### Economics - Lecture 5

Costs of Production