Chapter 6: Technology,

Production, and Costs

Lecture Summary
Module 4
 • Opportunity cost
Essential • Implicit costs versus explicit costs

Economics • Law of diminishing returns (See

The Law (or Principle) Of Diminishin
Concepts: g Marginal Returns (or Productivity)
Explained in One Minute – YouTub
e
)
• Economies of scale (See
https://www.youtube.com/watch?v
=rYvzM_tayY4
)
Implicit • Opportunity cost: The highest-valued
alternative that must be given up to engage in
costs an activity.
• Explicit cost: A cost that involves spending
versus money.

explicit • Implicit cost: A non-monetary opportunity

cost.

costs
 Let’s say you have some savings of $100,000. You
have a choice: Save or Invest in a property. Your
financial adviser develops some basic estimations.
Class What is your decision? How much are the
opportunity cost, explicit cost and implicit cost?
Activity: Return on saving Return on investment
Save or Starting balance $100,000 $100,000
Property Annual return (exclude
taxes and expenses)
+$5,450 (refer to Note 2) +$33,780 (Refer to Note 3)

Investment? Expenses on servicing loan - -$39,480 (Refer to Note 4)

Expenses on property costs - -$6,800 (Refer to Note 5)

Return (net) $105,450 (Refer to Notes 1 $87,500

and 2)
Note:
1. Refer to the link for savings interest: https://moneysmart.gov.au/saving/savings-goals-calculator#!focus=1
https:// 2. Saving interest rate is 5.45% p.a. Assume no regular saving, no taxes and expenses on savings.
forms.office.com/r/ 3. Assume you purchase an investment property at a value of $600,000. Interest rate on mortgage is 6.58% p.a. Gross rental yield is 5.63% p.a. (
https://www.westpac.com.au/personal-banking/home-loans/investing-in-property/rental-yield/)
cCPWxqjDCS
4. Assume you borrow $600,000 and repayment in interest only.
5. Assume the property costs $6,800 per annum, including council rates, strata fees, agency fees and property insurance.
The marginal product of labour and the
average product of labour

• Marginal product of labour: The additional output a firm produces as a

result of hiring one more worker.

• Law of diminishing returns: The principle that, at some point, adding more
of a variable input, such as labour, to the same amount of a fixed input,
such as capital, will cause the marginal product of the variable input to
decline.
Costs and output
• A firm’s costs of production will depend on its output.
• The more it produces, the more factors it must use.
• The more factors it uses, the greater its costs will be.
• The productivity of the factors – the greater their
productivity, the smaller will be the number of them that is
needed to produce a given level of output, and hence the
lower the cost of that output
• The price of the factors – the higher the price, the higher
will be the costs of production.
Average and marginal costs

• We know that in the short run, some factors are fixed in supply such as rent on land is a
fixed cost.
• The total cost of variable factors, does vary with output such as the cost of raw of material
is a variable cost e.g., oil price.
• Here are the formulas:
• AC = TC/Q
• AC = AFC + AVC
• MC = Change in TC/change in Q
Note: Average Cost (AC) is cost per unit of production. MC is the extra cost of producing one
more unit. AFC is average fixed cost. AVC is average variable cost. Q is quantity.
 The cost of producing any level of output depends on the
amount of input used and the price the firm must or willing to
pay for them.

Short There are fixed factors e.g., lands or buildings and variable
factors e.g., labour to determine firms output production.

Run
costs
In the short run, firms can increase output by using more
variable factors.

Production in the short run is subject to diminishing returns. It

says: when one or more factors are held fixed, there will come a
point beyond which the extra output from additional units of
the variable factor will diminish.
Activity: The
“Surfboards Production”
• Download “Economic
Activity_surfboards production” Excel
file.
• Complete the exercises in the Excel
file.
 Long run costs

• In the long run, all factors of production are variable. Firms have enough time to vary all
inputs (examples?) and combine all its inputs based on their desired production output.
• In the long run, firms will have to make a number of decisions about the scale of its
operations and the techniques of production it will use. In this case, firms can distinguish
three possible situations:
• Constant return to scale – this is where a given percentage increase in inputs will lead to the same
percentage increase in output.
• Increasing return to scale – this is where a given percentage increase in inputs will lead to a larger
percentage increase in output.
• Decreasing return to scale – this is where a given percentage increase in inputs will lead to a smaller
percentage increase in output.
Case Study:
Aluminium
Smelting in
Australia
•Go to ECU Library -> Click “A-Z Databases” ->
Search “IBISWorld”. Type “C2132 - Aluminium
Smelting in Australia” and download the
industry report.
•Read the report and discuss with your group
from economic perspectives.
• Global demand and supply
• Costs of production
• Revenue growth
• External environment
 Discussion: The Journey of
APPLE
• Read “Steve Jobs and the Apple Story” by Andrew Beattie from Investopedia.
• (Optional) Watch the movie called “Steve Jobs”, by Kanopy (Firm). (2015). Steve Jobs. Kanopy
Streaming. http://www.kanopystreaming.com/node/220532. (You can access it via the ECU
library using your student ID and password.)

Questions:
1. What were the challenges faced when Steve Jobs first established Apple as a startup?
2. How did the company maintain its competitiveness?
3. Are the challenges in this current business climate different from when Apple was a new startup? If not, why?
In Class-
Exercises
1. The table below shows how a firm’s output varies with labour input, all other inputs
fixed.

Labour input Output

(units)
1 6
2 16
3 29
4 44
5 55
6 60
7 62
Labour costs $500 a unit. The fixed inputs cost $1500.

(a) Derive a table showing for each output level given above:
(i) average fixed cost
(ii) average variable cost
(iii) average total cost
(iv) marginal cost. (Note: It is only possible to calculate the ‘average’ marginal cost
over output ranges, e.g. between 6 and 16 etc.)
(b) Plot the AFC, AVC, ATC and MC schedules. (Note: Plot the marginal cost figures at
the midpoint of the output range to which they refer.)
(c) Comment on and explain the shape of the AVC curve and ATC curve.
(d) Comment on and explain the relation between the MC and ATC curves.
Q2. The table above shows the following relationship between hours spent fishing and the
quantity of fish caught for Juan, a commercial fisherman.

Labour Quantity of Marginal Product

(hours) Fish (metrics) (metrics)
1 10
2 18
3 24
4 28
5 30
6 32

a. Complete the Marginal Product column

b. Characterise the production function, that is, does the production function display
increasing marginal returns, diminishing marginal returns, etc.
c. Using the data above, graph Juan’s marginal product curve. Be sure to label the
horizontal and vertical axes. Is your graph consistent with your answer to part (b)? Explain.
d. Juan uses the following inputs for fishing—a small wooden boat (B), a fishing pole
(P) and of course, his labour (L). Treating the boat and the fishing pole as fixed inputs and
using the data above, graph Juan’s Total Product of labour curve. Be sure to label the
horizontal and vertical axes.
Q3. Cost and Revenue of Good X.

Quantity Marginal Revenue ($) Average Cost ($)

0 Not Available Not Available
1 8 9
2 8 5
3 8 3.67
4 8 3.25
5 8 3.8
6 8 4.5
7 8 5.29

Fixed cost is $5.

Referring the table above, answer the following questions, construct a column of

AC=TC/Q. To find total cost, TC=AC×Q. Then, calculate

total cost and marginal cost. (Hint: First, calculate the total cost. Recall

MC=∆TC/∆Output)