Lecture Principles of Microeconomics - Chapter 8: Costs. After reading this chapter, you should be able to answer the following questions: What are different types of costs? What is diminishing marginal returns? Why do marginal costs increase? Why is the average total costs curve U-shaped? What is the relationship between the average total costs curve and marginal costs curve? What is the difference between short run and long run? What are economies and diseconomies of scale? | Chapter 8 Costs McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What are different types of costs? What is diminishing marginal returns? Why do marginal costs increase? Why is the average total costs curve U-shaped? What is the relationship between the average total costs curve and marginal costs curve? What is the difference between short run and long run? What are economies and diseconomies of scale? 8- Costs: Economic Terms Output = number of goods produced. Variable inputs = inputs that can be changed with output. Fixed inputs = inputs that can not be changed with output. Fixed costs = costs that are the same regardless of output. Variable costs = costs that vary with output Total costs = fixed costs + variable costs Marginal costs = the extra cost of making one more good. 8- Average Costs Total Costs = Fixed Costs + Variable Costs 8- Average Costs Average Total Costs = Average Fixed Costs + . | Chapter 8 Costs McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What are different types of costs? What is diminishing marginal returns? Why do marginal costs increase? Why is the average total costs curve U-shaped? What is the relationship between the average total costs curve and marginal costs curve? What is the difference between short run and long run? What are economies and diseconomies of scale? 8- Costs: Economic Terms Output = number of goods produced. Variable inputs = inputs that can be changed with output. Fixed inputs = inputs that can not be changed with output. Fixed costs = costs that are the same regardless of output. Variable costs = costs that vary with output Total costs = fixed costs + variable costs Marginal costs = the extra cost of making one more good. 8- Average Costs Total Costs = Fixed Costs + Variable Costs 8- Average Costs Average Total Costs = Average Fixed Costs + Average Variable Costs 8- Rocket Ship vs. Space Elevator Fixed Costs Variable Costs Total Costs Rocket Ship $1 billion Output X $10 million $1 billion + (Output X $10 million) Space Elevator $50 billion Output X $1,000 $50 billion + (Output X $1,000) 8- Costs For Rocket Ship Output Average Fixed Costs = Average Variable Costs = Average Total Costs = Average Fixed Costs + Average Variable Costs 1 $1 billion $10 million $ billion 10 $100 million $10 million $110,000,000 1,000 $1 million $10 million $11,000,000 4,900 $ million $10 million $10,200,000 1,000,000 $1,000 $10 million $10,001,000 1 billion $1 $10 million $10,000,001 8- Costs For Space Elevator Output Average Fixed Costs = Average Variable Costs = Average Total Costs = Average Fixed Costs + Average Variable Costs 1 $50 billion $1,000 $50 billion + $1,000 10 $5 billion $1,000 $5 billion + $1,000 1,000 $50 million $1,000 $50,001,000 4,900 $ million $1,000 $10,201,000 1,000,000 $50,000 $1,000 $51,000
