Microeconomics calculating costs

Introduction to Costs and Calculating Costs

• Companies must monitor income and expenses to understand their financial health.
• In economics, firms are typically seen as profit maximizers.
• Debate exists around whether firms truly prioritize profit maximization.
• If a firm consistently incurs losses, it risks going out of business.

Production Function

• A production function illustrates the relationship between input (workers) and output (canoe paddles produced).
• Example: A canoe paddle manufacturing shop.
• Input: Number of workers.
• Output: Number of canoe paddles produced each hour.
• Data table representation:
• 0 workers → 0 paddles
• 1 worker → 4 paddles
• 2 workers → 10 paddles
• 3 workers → 13 paddles
• 4 workers → 15 paddles
• 5 workers → 16 paddles

Calculating Total Variable Costs (TVC)

• Variable costs depend on the number of workers.
• Wage per worker: $25/hour.
• TVC calculations:
  • 0 workers × $25 = $0
  • 1 worker × $25 = $25
  • 2 workers × $25 = $50
  • 3 workers × $25 = $75
  • 4 workers × $25 = $100
  • 5 workers × $25 = $125

Fixed Costs (FC)

• Fixed costs are the same regardless of production level (e.g. rent, loans, equipment).
• Example Fixed cost: $25.
• FC remains unchanged as output varies.

Total Costs (TC)

• TC = Total Variable Cost + Fixed Costs.
• Total Cost calculations:
• 0 workers → TVC of $0 + FC of $25 = TC of $25
• 1 worker → TVC of $25 + FC = TC of $50
• 2 workers → TVC of $50 + FC = TC of $75
• 3 workers → TVC of $75 + FC = TC of $100
• 4 workers → TVC of $100 + FC = TC of $125
• 5 workers → TVC of $125 + FC = TC of $150

Summary of Output and Total Costs

• Relationship between output, workers, and total costs analyzed in a table format:
• 0 workers → Output = 0, TC = $25
• 1 worker → Output = 4 paddles, TC = $50
• 2 workers → Output = 10 paddles, TC = $75
• 3 workers → Output = 13 paddles, TC = $100
• 4 workers → Output = 15 paddles, TC = $125
• 5 workers → Output = 16 paddles, TC = $150

Cost Formulas

• Total Variable Costs (TVC) = Number of Workers × Wage Rate
• Fixed Costs (FC) = $25 (constant)
• Total Costs (TC) = Total Variable Costs + Fixed Costs

Next Steps

• Further discussions on calculating average and marginal costs in the next video segment.