Page 271 - The Principle of Economics

CHAPTER 13 THE COSTS OF PRODUCTION 277
QUANTITY OF LEMONADE (GLASSES PER HOUR)
0 1 2 3 4 5 6 7 8 9
10
TOTAL FIXED
COST COST
$ 3.00 $3.00 3.30 3.00 3.80 3.00 4.50 3.00 5.40 3.00 6.50 3.00 7.80 3.00 9.30 3.00
11.00 3.00 12.90 3.00 15.00 3.00
VARIABLE
COST
$ 0.00 0.30 0.80 1.50 2.40 3.50 4.80 6.30 8.00 9.90 12.00
AVERAGE AVERAGE FIXED VARIABLE COST COST
AVERAGE TOTAL
MARGINAL
$3.00 $0.30 1.50 0.40 1.00 0.50 0.75 0.60 0.60 0.70 0.50 0.80 0.43 0.90 0.38 1.00 0.33 1.10 0.30 1.20
$3.30 1.90 1.50 1.35 1.30 1.30 1.33 1.38 1.43 1.50
$0.30 0.50 0.70 0.90 1.10 1.30 1.50 1.70 1.90 2.10
Table 13-2
COST COST
— ——
THE VARIOUS MEASURES OF COST: THIRSTY THELMA’S LEMONADE STAND
Thelma’s total-cost curve has a shape similar to Hungry Helen’s. In particular, it becomes steeper as the quantity produced rises, which (as we have discussed) re- flects diminishing marginal product.
FIXED AND VARIABLE COSTS
Thelma’s total cost can be divided into two types. Some costs, called fixed costs, do not vary with the quantity of output produced. They are incurred even if the firm produces nothing at all. Thelma’s fixed costs include the rent she pays because this cost is the same regardless of how much lemonade Thelma produces. Similarly, if Thelma needs to hire a full-time bookkeeper to pay bills, regardless of the quantity of lemonade produced, the bookkeeper’s salary is a fixed cost. The third column in Table 13-2 shows Thelma’s fixed cost, which in this example is $3.00 per hour.
Some of the firm’s costs, called variable costs, change as the firm alters the quantity of output produced. Thelma’s variable costs include the cost of lemons and sugar: The more lemonade Thelma makes, the more lemons and sugar she needs to buy. Similarly, if Thelma has to hire more workers to make more lemon- ade, the salaries of these workers are variable costs. The fourth column of the table shows Thelma’s variable cost. The variable cost is 0 if she produces nothing, $0.30 if she produces 1 glass of lemonade, $0.80 if she produces 2 glasses, and so on.
A firm’s total cost is the sum of fixed and variable costs. In Table 13-2, total cost in the second column equals fixed cost in the third column plus variable cost in the fourth column.
fixed costs
costs that do not vary with the quantity of output produced
variable costs
costs that do vary with the quantity of output produced