Principles of Microeconomics / Unit 6 MIC 0514 worked example, 60 to 90 seconds
From a Production Table to a Cost Table
The idea
A cost table is a production table read backward. For each output level, the number of workers needed is known from the production table; multiply by the wage for variable cost; add the fixed cost for total cost. Variable cost rises with output, slowly at first while marginal product is rising, then faster once diminishing returns make each extra loaf need more labor. Total cost has the same shape, lifted by the fixed cost.
In practice
Worked example: with workers at sixty dollars a day and a fixed cost of one hundred, the bakery's outputs of zero, twenty, fifty, seventy, eighty and eighty-five loaves need zero to five workers. Variable cost runs zero, sixty, one hundred twenty, one hundred eighty, two hundred forty, three hundred. Total cost runs one hundred, one hundred sixty, two hundred twenty, two hundred eighty, three hundred forty, four hundred. Each worker adds sixty dollars, but from the third on, each sixty dollars buys fewer loaves.
Where people slip
The rows are indexed by workers here, so the output steps are uneven; a cost table indexed by units of output would interpolate. And total cost at zero output is not zero: it is the fixed cost, which a firm producing nothing still pays in the short run.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it