Producer Theory

class: center, middle, inverse, title-slide

# Producer Theory
## EC 201: Principles of Microeconomics
### Kyle Raze
### Winter 2020

---

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# Prologue

---
# Housekeeping

**Midterm 2:** Grades posted.

- You should have received an email with your score, an approximate grade, and an attachment with your answer choices.

**Discussions**

- Upcoming worksheets important for final exam preparation.

**Optional Short Essays**

- One percentage point of extra credit per essay (up to four total).
- Submit on Canvas.
- Due by 10:00 on Monday of Week 10 (before lecture).
- See guidelines in the syllabus.

---
# Agenda

**Goal:** Understand the tradeoffs that producers face.

- How do producers make decisions?

- Where does the supply curve come from?

**Q:** Why should you care?

- **A:** Useful insights for entrepreneurs, managers, and policymakers.

**Outline**

1. Costs of production (today).

2. Firms in competitive markets (Wednesday).

3. Monopoly (next week).

---
# Profit

**Assumption:** Firms seek to maximize profit.

- Profit .mono[=] total revenue .mono[-] total cost

**Q:** Do all businesses try to maximize profit?

- Publicly-traded firms?

- Family businesses?

- Non-profit organizations?

---
# Profit Maximization

To maximize profit, a producer must answer several interrelated questions:

- How much should I produce?

- What price should I set?

- How much labor should I hire? How much capital should I purchase?

- Should I shut down or keep producing?

---
# Profit Maximization

Answers to those questions depend on

1. Production technology .mono[-->] cost structure.

2. Market structure .mono[-->] ability to set prices.

3. Short-run *vs.* long-run.

---
class: inverse, middle

# Costs of Production

---
# Costs

## Total cost .mono[=] .purple[explicit cost] .mono[+] .pink[implicit cost]

## .purple[Explicit cost]

> .purple[Tangible, out-of-pocket expenses.]

- *e.g.,* wages, rent, raw materials, maintenance, taxes, *etc.*

---
# Costs

## Total cost .mono[=] .purple[explicit cost] .mono[+] .pink[implicit cost]

## .pink[Implicit cost]

> .pink[Opportunity cost of already-owned resources.]

- Forgone value of the next-best investment <br> `$\quad$` .mono[-->] no out-of-pocket payments.

- *e.g.,* starting a different business, investing in the stock market, *etc.*

---
# Costs

## Example

Need $100,000 to start a business and the interest rate is 5%.

**Option 1:** Borrow $100,000.

- Explicit cost .mono[=] $5,000.

**Option 2:** Use $40,000 from savings and borrow $60,000.

- Explicit cost .mono[=] $3,000 .mono[-->] 5% interest on the loan.

- Implicit cost .mono[=] $2,000 .mono[-->] 5% forgone interest on the $40,000 from savings.

.pink[Total cost .mono[=] $5,000 for either option.]

---
# Accounting *vs.* Economic Profits

## Accounting profit <br> `$\quad$` .mono[=] total revenue .mono[-] .pink[explicit cost]

## Economic profit <br> `$\quad$` .mono[=] total revenue .mono[-] (.pink[explicit cost] .mono[+] .purple[implicit cost])

<br>

**Q:** Which of the following is true?

> **A.** Accounting profit .mono[>] economic profit.

> **B.** Accounting profit .mono[<] economic profit.

---
count: false
# Accounting *vs.* Economic Profits

## Accounting profit <br> `$\quad$` .mono[=] total revenue .mono[-] .pink[explicit cost]

## Economic profit <br> `$\quad$` .mono[=] total revenue .mono[-] (.pink[explicit cost] .mono[+] .purple[implicit cost])

<br>

**Q:** Which of the following is true?

> .pink[**A.** Accounting profit .mono[>] economic profit.]

> **B.** Accounting profit .mono[<] economic profit.

---
# Accounting *vs.* Economic Profits

Positive accounting profit doesn't always mean that a firm is doing well.

1. Economic profit .mono[<] 0 <br> `$\quad$` .mono[==>] Current business is less profitable than the next-best option.

2. Economic profit .mono[=] 0 <br> `$\quad$` .mono[==>] Current business is just as profitable as the next-best option.

3. Economic profit .mono[>] 0 <br> `$\quad$` .mono[==>] Current business is more profitable than the next-best option.

---
# Production Technology

**Output:** The product that a firm produces.

**Inputs:** Resources used in a firm's production process to produce output.

- Land: natural resources, site of business, *etc.*

- Labor: workers, managers, *etc.*

- Capital: machinery, computers, vehicles, *etc.*

.pink[**Production function:** Mathematical description of the relationship between inputs and output in a firm's production process.]

.center[.pink[Inputs .mono[-->] production technology .mono[-->] output]]

---
# Total Product

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Total amount of output from a given quantity of input.

**Example:** Labor (L), holding other inputs constant.

]

---
count: false
# Total Product

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Total amount of output from a given quantity of input.

**Example:** Labor (L), holding other inputs constant.

]

---
# Marginal Product

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Change in total product from a one-unit increase in an input.

**Example:** Labor (L), holding other inputs constant.

]

---
count: false
# Marginal Product

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Change in total product from a one-unit increase in an input.

**Example:** Labor (L), holding other inputs constant.

]

---
count: false
# Marginal Product

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Change in total product from a one-unit increase in an input.

**Example:** Labor (L), holding other inputs constant.

]

---
# Diminishing Marginal Product

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-6-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Idea

.purple[Marginal product eventually decreases] as more of one input is used with a fixed quantity of other inputs.

]

---
class: clear-slide

**Q:** Suppose you are a watermelon farmer. If the price of a watermelon is $5 and the market wage is $2000 per month, how many workers should you hire?

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Marginal Product </th>
   <th style="text-align:center;"> Marginal Product × P </th>
   <th style="text-align:center;"> Wage </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
</tbody>
</table>

---
count: false
class: clear-slide

**Q:** Suppose you are a watermelon farmer. If the price of a watermelon is $5 and the market wage is $2000 per month, how many workers should you hire?

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Marginal Product </th>
   <th style="text-align:center;"> Marginal Product × P </th>
   <th style="text-align:center;"> Wage </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 600 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 200 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
</tbody>
</table>

---
count: false
class: clear-slide

**Q:** Suppose you are a watermelon farmer. If the price of a watermelon is $5 and the market wage is $2000 per month, how many workers should you hire?

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Marginal Product </th>
   <th style="text-align:center;"> Marginal Product × P </th>
   <th style="text-align:center;"> Wage </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> — </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $5000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $4000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 600 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 200 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
  </tr>
</tbody>
</table>

.purple[**Think at the margin:**] Keep hiring as long as .purple[Marginal Product .mono[&times;] P] `$\geq$` .purple[Wage].

**A:** .pink[You should hire 4 workers.]

---
class: clear-slide

**Input:** Land .mono[-->] must pay $1000 per month in rent, regardless of the number of watermelons grown.

**Input:** Labor .mono[-->] market wage is $2000 per month.

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Cost of Land </th>
   <th style="text-align:center;"> Cost of Labor </th>
   <th style="text-align:center;"> Total Cost </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
</tbody>
</table>

---
count: false
class: clear-slide

**Input:** Land .mono[-->] must pay $1000 per month in rent, regardless of the number of watermelons grown.

**Input:** Labor .mono[-->] market wage is $2000 per month.

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Cost of Land </th>
   <th style="text-align:center;"> Cost of Labor </th>
   <th style="text-align:center;"> Total Cost </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
</tbody>
</table>

---
count: false
class: clear-slide

**Input:** Land .mono[-->] must pay $1000 per month in rent, regardless of the number of watermelons grown.

**Input:** Labor .mono[-->] market wage is $2000 per month.

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Cost of Land </th>
   <th style="text-align:center;"> Cost of Labor </th>
   <th style="text-align:center;"> Total Cost </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $4000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $6000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $8000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $10000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;">  </td>
  </tr>
</tbody>
</table>

---
count: false
class: clear-slide

**Input:** Land .mono[-->] must pay $1000 per month in rent, regardless of the number of watermelons grown.

**Input:** Labor .mono[-->] market wage is $2000 per month.

<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Workers (L) </th>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Cost of Land </th>
   <th style="text-align:center;"> Cost of Labor </th>
   <th style="text-align:center;"> Total Cost </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $2000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $3000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $4000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $5000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $6000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $7000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $8000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $9000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $10000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $11000 </td>
  </tr>
</tbody>
</table>

---
class: clear-slide

**Input:** Land .mono[-->] must pay $1000 per month in rent, regardless of the number of watermelons grown.

**Input:** Labor .mono[-->] market wage is $2000 per month.

.center[.purple[**Total Cost Curve**]]

.pull-left[
<table>
 <thead>
  <tr>
   <th style="text-align:center;"> Watermelons (Q) </th>
   <th style="text-align:center;"> Total Cost </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 0 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $1000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $3000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 1800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $5000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2400 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $7000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 2800 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $9000 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> 3000 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> $11000 </td>
  </tr>
</tbody>
</table>
]

.pull-right[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-15-1.svg" style="display: block; margin: auto;" />
]

---
# Total Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-16-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Origin story

Production function .mono[+] input prices <br> .mono[-->] .purple[**total cost curve**].

**Q:** Why is the total cos curve S-shaped?

**A:** .purple[Diminishing marginal product.]

]

---
# Production Decisions

**Q:** How does a firm decide how much output to produce?

- To increase profit, should it produce more or fewer units?

**A:** Think at the margin.

- If the cost of additional units is less than the revenue from selling them, then profits rise as production increases.

- If the cost of additional units exceeds the revenue from selling them, then profits decline as production increases.

---
# Marginal Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-17-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Change in total cost that arises from a one-unit increase in output.

]

---
count: false
# Marginal Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-18-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> Change in total cost that arises from a one-unit increase in output.

]

---
# Fixed *vs.* Variable Costs

## Total cost .mono[=] .green[fixed costs] .mono[+] .pink[variable costs]

## .green[Fixed costs]

> .green[Costs that **do not vary** with the quantity of output produced.]

- *e.g.,* rent, cost of equipment, loan payments, *etc.*

- Do not contribute to marginal cost.

---
# Fixed *vs.* Variable Costs

## Total cost .mono[=] .green[fixed costs] .mono[+] .pink[variable costs]

## .pink[Variable costs]

> .pink[Costs that **vary** with the quantity of output produced.]

- *e.g.,* wages, cost of raw materials, *etc.*

- Contribute to marginal cost.

---
# Fixed *vs.* Variable Costs

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-19-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## .green[Fixed costs (FC)]

> .green[Costs that **do not vary** with Q.]

## .pink[Variable costs (VC)]

> .pink[Costs that **vary** with Q.]

]

---
# Average Fixed Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> AFC .mono[=] FC &divide; Q

Decreases as Q rises <br> .mono[-->] more output spread over same fixed cost.

]

---
# Average Variable Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-21-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> AVC .mono[=] VC &divide; Q

]

---
# Average Total Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-22-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> ATC .mono[=] TC &divide; Q <br> .mono[=] AFC .mono[+] AVC

]

---
count: false
# Average Total Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-23-1.svg" style="display: block; margin: auto;" />
]

.less-right[
## Definition

> ATC .mono[=] TC &divide; Q <br> .mono[=] AFC .mono[+] AVC

Efficient scale .mono[=] Q that minimizes ATC.
]

---
# Average Total Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-24-1.svg" style="display: block; margin: auto;" />
]

.less-right[

Efficient scale .mono[=] Q that minimizes ATC.

Q .mono[<] efficient scale: Falling AFC pulls ATC down.

Q .mono[>] efficient scale: Rising AVC pulls ATC up.
]

---
# Average Total Cost .mono[+] Marginal Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-25-1.svg" style="display: block; margin: auto;" />
]

.less-right[
MC .mono[<] ATC .mono[==>] ATC is falling.

MC .mono[>] ATC .mono[==>] ATC is rising.

MC crosses ATC at the Q that minimizes ATC.

]

---
count: false
# Average Total Cost .mono[+] Marginal Cost

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-26-1.svg" style="display: block; margin: auto;" />
]

.less-right[
MC .mono[<] ATC .mono[==>] ATC is falling.

MC .mono[>] ATC .mono[==>] ATC is rising.

MC crosses ATC at the Q that minimizes ATC.

]

---
# Short-Run *vs.* Long-Run

## Short-Run

Some inputs are fixed.

- *e.g.,* land, factories, assembly-line robots, *etc.*

- Fixed inputs .mono[-->] fixed cost.

## Long-Run

All inputs are variable

- *e.g.,* firms can build new factories or sell existing ones.

- Firms use most efficient mix of inputs for any Q (*e.g.,* factory with lowest ATC).

---
# Long-Run ATC

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-27-1.svg" style="display: block; margin: auto;" />
]

.less-right[

A firm can choose from three factory sizes: S, M, L.

Each factory size has its own short-run ATC curve.

The firm can change to a different factory size in the long run, but not in the short run.

]

---
# Long-Run ATC

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-28-1.svg" style="display: block; margin: auto;" />
]

.less-right[

In the long run, a firm will choose the factory size that minimizes long-run ATC given the production level.

]

---
# Long-Run ATC

.more-left[
<img src="14-Producer_Theory_files/figure-html/unnamed-chunk-29-1.svg" style="display: block; margin: auto;" />
]

.less-right[
Typical long-run average total cost curve.

- Traced out by numerous short-run ATC curves.

However, LRATC can take a variety of forms.

- Depends on returns to scale.

]

---
# Returns to Scale

## Economies of scale

> Long-run ATC falls as the quantity of output rises.

- Increased specialization among workers.

- More common when Q is low.

- *e.g.,* tech start-ups?

---
# Returns to Scale

## Constant returns to scale

> Long-run ATC stays the same as the quantity of output rises.

- *e.g.,* restaurant chains?

---
# Returns to Scale

## Diseconomies of scale

> Long-run ATC rises as the quantity of output rises.

- Coordination problems in large firms.

- Failure to control costs.

- More common when Q is high.

- *e.g.,* hospitals?