00:00:05.900

Okay, everybody less scarce started.

00:00:10.740

professor trainees out-of-town today so our replace him talking about production

00:00:15.020

cost today...think this stuff is so boring that you want me to

00:00:20.860

teach it but it's very important...sense first-aid

00:00:25.350

describe the firm's behavior so when you think of how for make choice in

00:00:27.790

the whole economy you have to think about

00:00:33.180

...production cost the second sense is this part of material is a little bit

00:00:36.980

mass intensive compared to other lecture but it

00:00:41.890

is always almost surely will show up on the exam so

00:00:51.320

make sure you pay for attention today okay so let's begin.

00:00:53.580

We thinking of the production cause we

00:00:58.480

...divided two-part the first part is a fixed cost so what is a

00:01:03.060

fixed...he just does not depend on the quantity of output

00:01:07.500

...thinking of we're having a car factory.

00:01:12.780

to produce car you have to buy land for the factory you have to

00:01:17.780

set up the machines and the production lines and all this money spend

00:01:23.320

...depend on how many cars you...you produce right so this part of

00:01:28.880

cost usually...calculate of fixed cost.

00:01:33.880

And, the other part of cost we called variable cost

00:01:38.810

because it will challenge as you produce more...as you produce

00:01:43.800

more so come back to the curve factory example if you want to produce

00:01:48.210

small car you have to buy more parts you have to hire.

00:01:52.900

More workers you have...more truckers...transport all the

00:01:57.230

new car productive right so as you produce more you have

00:02:01.550

...spend more money to produces on the material

00:02:04.470

...are the input?

00:02:07.690

So, that's variable cost.

00:02:13.130

So, then the final equation is purely ...since that

00:02:20.900

the total cost is adding fixed costs in the variety of cost together.

00:02:26.090

So, everyone is clear with...ok.

00:02:30.480

So, now let's come let's see a numerical example so in the car

00:02:34.760

factor example for all the fixed cost like the

00:02:37.830

land the machine is nine thousand.

00:02:44.730

And, the variety will costs is if you don't produce

00:02:49.870

anything you don't need to buy any parse...workers so the rabble cost

00:02:52.330

is zero if the quantities zero.

00:02:56.800

But, if you produce one car you have to

00:02:59.490

high somebody to work so these costs...a thousand-dollar.

00:03:04.060

And, if you produce two cars you have to

00:03:08.690

buy more parse and maybe the workers have to work longer I have more workers on

00:03:12.190

...cost goes up okay so the total

00:03:17.790

...just purely the sum of this...

00:03:20.580

So, if we draw this on the diagram

00:03:24.260

would was see so first we draw the total cost

00:03:27.610

...so basically the last column.

00:03:31.520

I should have the so we basically just draw

00:03:36.750

...column in a diagram and was...

00:03:41.200

First total cost...at the level of output arises right this

00:03:44.970

is the basic intuition as we produce small

00:03:48.080

...probably the causes higher

00:03:52.580

and this part which is means you have to spend is cost even when you're

00:04:02.110

...zero so this part capture the fixed cost part.

00:04:05.410

Okay, so, sorry here's this to more line about the total

00:04:08.740

cost so this says total cost

00:04:13.610

is minimum cost of producing the output it just means you know,

00:04:14.920

it's not the firm's

00:04:20.100

...to something are the workers are not have a

00:04:24.960

...little high-wage or something so it's just the total cost is already

00:04:29.610

the producer trying hardest to minimum the cost already so

00:04:34.210

if you want the firm give you two cars you have at least?

00:04:35.840

To cover their cost so

00:04:40.730

this participates minimum cost repeat producing the output.

00:04:44.730

And, total cost includes a reasonable profit so here

00:04:50.020

this profit most means if you think and often normal return of

00:04:50.520

investment.

00:04:57.830

...of...if ...if I put the money in the bank I'll have a five

00:05:01.590

percent interest rate...in that sense the money

00:05:04.590

...invest in the factory car

00:05:09.010

fractured also give me five percent of return so that means that could

00:05:12.460

...acid total cost...money are barred from bank is also

00:05:19.350

cost so here is the total cost.

00:05:22.190

A very related concept and also

00:05:24.640

important these average cost.

00:05:29.130

It's very simple to calculate it it's basically just you divide the total cost by the

00:05:31.900

quantity tells you on each

00:05:38.760

of unit of the output how much the cost is.

00:05:40.390

So, here.

00:05:42.980

Back to...numbers you

00:05:47.510

...see that ac column is

00:05:53.950

just total cost divided by the quantity rate.

00:05:57.160

So, if you draw the average cost.

00:05:58.310

On a curve what

00:06:04.190

...you'll find now it has a u shape here so why doesn't

00:06:16.140

Anyone get a new idea.

00:06:20.470

Yeah, exactly so why the average cost

00:06:21.890

decrease.

00:06:24.520

In thewhen you increase output?

00:06:29.170

Because the fixed...what average our...so if you only

00:06:33.540

produce one car you have to pay all the machine or the production line

00:06:38.400

prefer produce to all ten then on each of the car the

00:06:42.700

part the average fixed cost is only a half or tenth

00:06:47.300

...so because usually the fixed cost pretty large

00:06:53.240

...the quantity increase the average cost decrease.

00:06:55.890

That's because of the fixed cost

00:06:59.330

...average out among larger quantity

00:07:13.020

...why this part is increasing.

00:07:16.720

Yeah, so, as you increase you being so quantity

00:07:21.620

it especially not high-level than the variable costs my dominant the whole cost

00:07:25.265

park right like you buy all the mature you can get in united

00:07:29.910

states and you have to import some other steal from other country and all the

00:07:34.810

transportation costs may be really high to-you so then this part

00:07:39.280

increase just means ask the resource...more

00:07:43.150

scares then the variable costs might increase.

00:07:47.940

As a corny goes up...drugs the average cost

00:07:54.860

...okay yes question.

00:07:59.580

Yeah, it has actually so when you think of

00:08:02.720

the economy to the skills so it's basically

00:08:06.470

half the decreasing level it means asses...larger

00:08:18.890

...gets...on economy wise right and this is decreasing?

00:08:19.780

Ok,

00:08:24.330

so, now we come to a concept which can distinguish people who don't take

00:08:28.490

...one right so marginal cost is has a similar flavor as

00:08:32.590

the marginal will is to pay...marginal cost is thinking

00:08:37.440

of if we forget whatever we put the money on the factory if

00:08:43.180

we produce one extra unit how much money we how much

00:08:46.140

what is the cost?

00:08:52.440

So, maybe it's easier use these numbers right so if

00:08:56.240

...so the marginal cost forget about the average cost

00:09:00.870

is always come from the total cost so what happens is if you produce

00:09:05.680

zero it's everything is zero you don't calculat marginal cost.

00:09:11.400

So, if you if you thinking about the first unit so.

00:09:16.460

Fixed causes nine thousand and...produce one unit the total cost

00:09:19.710

is ten thousand so the extra money you spend

00:09:28.530

producing from zero to one is only one thousand right.

00:09:32.860

And, similarly if we check in the second unit you...

00:09:37.520

okay we already have the machine we already have the factually and

00:09:42.120

we already produce the first unit now I'm thinking of whether I should

00:09:46.750

produces second unit so the extra money to produce

00:09:52.220

a second unit is two thousand right because it cost you

00:09:57.030

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

00:10:06.850

one extra unit alright so if you do this.

00:10:13.740

Deduction everywhere you all get this marginal cost.

00:10:15.790

So, if we draw this on a diagram.

00:10:19.460

Its increasing.

00:10:21.640

Rise...is increasing

00:10:26.590

needs exactly the reason what are we talking about the increase in average cost

00:10:31.510

the marginal cost of producing one more car.

00:10:35.570

Is more costly because the resources case year

00:10:40.390

...less workers to be hired in the local cd?

00:10:46.990

the parts price my go up if I produce more if I.

00:10:52.750

that's why the marginal cost curve have increase.

00:10:59.880

So, here we said is four high-output because when you in

00:11:01.170

...high enough output.

00:11:07.200

The resource guests scarcity of resource might kick in but thinking know

00:11:11.710

for low high-output output what would you guess about the

00:11:19.800

marginal cost curve instead of its steeply increasing.

00:11:22.180

What would it be will be flatter?

00:11:28.620

And, you might even decrease rate.

00:11:36.680

Think of the beginning of the production.

00:11:38.490

...so here, yeah, that's

00:11:43.340

actually very good point so here the marginal cost has nothing to do with

00:11:48.780

a fixed costs rate why because the fixed causes nine thousand

00:11:52.560

...never change with output so here the question we're thinking

00:11:57.540

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

00:12:07.830

the nice thousand actually is not anywhere in the marginal cost so

00:12:13.660

when you think of the marginal cost you should separated from

00:12:16.910

...fixed costs should be...

00:12:21.020

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

00:12:34.020

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?

00:12:41.260

Return to scale right so more specifically

00:12:45.700

might be learning by doing right so the workers produce...first

00:12:50.330

...has to have all the special knowledge but when he produces second

00:12:55.290

car he already had the knowledge and he's most skillful at producing cars so the

00:13:01.340

...fewer hours for him to produce a car right so here is like when

00:13:06.530

you just produce a small quantity the scarcity of resource has

00:13:08.620

...or your marginal cost

00:13:26.130

yet but other knowledge.

00:13:29.280

The curves not exactly I mean corresponding to

00:13:33.910

these numbers right so here is probably more linear of flatter here

00:13:38.950

...just I probably just...the last trade these increasing

00:13:43.610

actually if you go to the real word and you will think its marginal cost curve

00:13:46.040

...something flatter like this and he's

00:13:51.180

...have a little bit decrease in the beginning us that's what we call return to scale

00:13:57.760

okay so, yeah, here is just tell you the trend is increasing.

00:14:01.950

Ok, now comes to the hard part.

00:14:04.640

So, here if we draw the average cost

00:14:09.480

...marginal cost together what do we will find.

00:14:13.600

So,...define...usually the average cost is

00:14:16.240

the higher than the marginal costs in the beginning.

00:14:25.740

What's the reason for this part.

00:14:29.590

Fixed costs rate yet because in the average cost you

00:14:32.050

calculated fixed cost but in marginal

00:14:38.060

cost you exclude up hard so in the first the every

00:14:42.410

...really hide to produce the first two cars because it has to

00:14:48.640

...for all the machine and the lend e.

00:14:52.600

...expensive that right so the so the average cost you

00:14:58.640

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

00:15:05.300

a lower than the average cost.

00:15:08.700

The extra unit you produce.

00:15:13.510

That each...moving average idea right so the extra unit

00:15:17.880

you produce the marginal cost is smaller than the average cost so you

00:15:24.620

...up and do an average again than the average...goes down right?

00:15:29.190

This...sense.

00:15:35.420

Any question on that so this is very important I want everybody knows that.

00:15:39.100

So, when marginal cost is lower?

00:15:41.240

Than the average cost.

00:15:44.130

Then...quantity goes up

00:15:48.740

the average cost decrees...the marginal cost thinking of

00:15:53.640

...smaller than the average number the new...average again so all the average

00:15:59.800

...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.

00:16:46.930

Not necessarily right so because one produced decide how

00:16:51.880

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.

00:17:39.630

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

00:25:45.460

Ok.