B Econ 500
Average and marginal costs
Philip Bond
Foster, UW
1
A few words on class overall
Official name of class is:
Introduction to Business Economics
In practice: “Micro”
Application of microeconomics to:
Business decisions (esp. source of profits)
Understanding broader economic trends
Economics as a way of thinking about
world
Relative to many core classes, this class is more about
giving you a way to think about the world
Less about specific tools (NPV, balance sheets etc)
Much of the value of economics is as
a map of dangers to avoid
A few words on class overall
Focus on concepts and applications
Minimize math
(I realize people have diverse preferences)
Economics is increasingly data-orientated, and is
concerned with an increasingly diverse range of topics
→team data assignments on early-deaths, and on gender
wage-gap
A few words on class overall
A common critique of economics: based on humans being
hyper-rational and self-interested
In my view, largely misguided, though economists often
don’t help themselves
In this class, (mostly) avoid these assumptions
Applying the material
Aim: give you as much practice as possible to apply
material
Especially to new settings
(least-exposed to AI-replacement)
We’ll spend lots of class time on this
Exams are relatively challenging
“word problems”
practice in class, and do “topic checks”
Mix of assignments
10% participation/attendance
each class has an in-class quiz
5% Short pre-class quizzes
maximize value of in-class time; 2 attempts allowed
15% Homework quizzes
help master the material
15% Longer data exercises
quantitative engagement with important topics
5% Topic checks
old exam questions; 2 attempts allows; more flexible deadlines
20%/30%, Exams I and II on Feb 8 and Mar 7
Questions about class overall?
Detailed syllabus on Canvas
Please use name tents
Try to sit in same seat each class
Closed laptop policy
(except when required for analysis)
I will bring copies of slides
Today: Average and marginal costs
From pre-class reading:
$42M for rental + employment costs
1M customers each year
$20 food+drink cost per customer
Total cost (TC) = $42M + 1M*$20 = $62M
Average cost (AC) of each customer=$62M/1M=$62
Marginal cost (MC) of each customer = $20
Costs defined by decision problem
A general point:
“Marginal” can only be understood in the
context of a specific decision
Serve additional customer? MC of customer
Stay open an extra hour? MC per hour
Open an additional location? MC of location
What is the lowest price you should
charge for food during happy hour?
Application
A city prohibits on-site dining because of health
concerns
Takeout will produce 30% of typical sales
Should restaurant offer takeout?
Typical restaurant revenue and costs
Sales
Expenses
Food and beverage costs
Labor costs
Occupancy and related costs
Depreciation and amortization
Other costs
General+admin costs
$63M
$62M
$20M
$21M
$5M
$2M
$6M
$8M
From Bureau of Labor Statistics:
For restaurants: kitchen staff are 1/3 of labor cost, servers 2/3
of labor cost
Source: Kura Sushi, fiscal year ending August
2019 (publicly traded “microcap” stock, so
accounts public)
Numbers consistent with standard breakdowns
of costs from industry guides, e.g.
Discuss in groups of 2-4, report back
Will randomly call on a couple of groups
To remember
``Marginal” defined by decision
Focus on costs that are a marginal for a decision
Ignore fixed costs
Line items such as depreciation, overhead,
administration
expenses are often fixed costs
(Recall Kura Sushi Statement of Operations)
Business plan: Movie ticket
subscriptions
$10/month –> subscriber can purchase unlimited movie
tickets (for personal use)
Market data (simplified), US movie-going population
89% attend 4 or movies/year
11% attend 18 movies/year
Average ticket price in US is ≈$9 (from NATO)
Market research suggests: If an individual subscribes, attends
twice as many movies
Assess business plan
Discuss in groups of 2-4, report back
Optional: A non-monetary application
[Assume that] You are concerned about CO2 emissions.
“cars emit 127g of CO2 per passenger per kilometre and buses
106g”
Should you travel by car or bus?
Summary
Marginal costs are what matter for decisions
Be careful not to inadvertently focus on average costs
Ignore costs that are fixed and/or sunk for a particular decision
Accounting entries such as overhead often contain such costs
Data
As mentioned, we’ll spend some of quarter
looking at data
Will often look at data tied to class topic
But today, will look at economic growth
Size of economy: GDP
Gross Domestic Product (GDP)
A measure of the size of the economy
US: GDP » $27.5T
Much easier to conceptualize in per-person terms (“per
capita”)
Population of US » 330M
So GDP/capita » $27.5T/330M » $83K
How has economy changed over time?
Produce a graph of real (inflation-adjusted)
GDP/capita since 1947
A very useful source:
FRED (Federal Reserve Economic Data) run by
Federal Reserve Bank at St Louis
Life expectancy over same period
Produce graph of life expectancy since 1960
(change of start date just reflects data on FRED)
Let’s look at another country
South Korea (Republic of Korea)
GDP/capita since 1960
Life expectancy since 1960
Make sure you can do this