Bài giảng MicroEconomics - Chapter 08 The Costs of Production

The Costs ofProductionChapter 8Chapter ObjectivesExplicit and implicit costsLaw of diminishing returnsFixed and variable costsTotal, average, and marginal costsThe firm’s size in the long run8-2Economic CostsEqual to opportunity costsExplicit + implicit costsExplicit costsMonetary paymentsImplicit costsValue of next best useSelf-owned resourcesSelf-employed resources8-3ProfitAccounting profitTotal revenue less explicit costNormal profitEqual to implicit cost Economic or pure profitTotal revenue less economic cost8-4Profits ComparedEconomicProfitAccountingCosts (ExplicitCosts Only)AccountingProfitExplicitCostsImplicit Costs(Including a Normal Profit)Economic(Opportunity)CostsTotal RevenueEconomicAccounting8-5Short and Long RunThe short runFixed plant capacityVariable intensity of plant useVariable outputThe long run Variable plant capacityFirms enter and exit8-6Production RelationshipsTotal product (TP)Marginal product (MP)Average product (AP)Average ProductTotal ProductUnits of Labor=Marginal ProductChange in Total ProductChange in Labor Input=8-7Law of Diminishing ReturnsFixed technologyAdd variable resource to fixed resourceMarginal product will declineBeyond some pointRationale8-8IncreasingMarginalReturnsLaw of Diminishing Returns(1)Units of theVariable Resource(Labor)(2)Total Product(TP)(3)Marginal Product(MP),Change in (2)/Change in (1)(3)AverageProduct(AP),(2)/(1)01234567801025456070757570101520151050-5-10.0012.5015.0015.0014.0012.5010.71 8.75]]]]]]]]DiminishingMarginalReturnsNegativeMarginalReturns8-90102030Total Product, TP1234567892010Marginal Product, MP123456789TPMPAPIncreasingMarginalReturnsDiminishingMarginalReturnsNegativeMarginalReturnsLaw of Diminishing Returns8-10Short-Run Production CostsFixed CostsDo not vary with outputVariable CostsMaterials, most laborTotal CostTC = TFC + TVC8-11Per-Unit Production CostsAverage fixed cost AFC = TFC/QAverage variable costAVC = TVC/QAverage total cost ATC = TC/Q = TFC/Q + TVC/QATC = AFC+AVCMarginal costMC = change in TC/change in Q8-12Short-Run Production CostsCosts123456789100Q1002003004005006007008009001000$1100TFCTCTVCTotalCostVariableCostFixedCost8-13Short-Run Production CostsCosts123456789100Q50100150$200AFCMCATCAVCAVCAFC8-14Production RelationshipsMarginal cost and diminishing returnsMarginal cost and marginal productMarginal cost and average variable costMarginal cost and average total costProduction curves and cost curvesShifts in cost curves 8-15Average Product andMarginal ProductCost (Dollars)Graphical RelationshipsMPAPMCAVCQuantity of OutputQuantity of Labor Production CurvesCost Curves8-16Long-Run Production CostsChoose your plant sizeMinimize ATCDifferent ATC curvesShort runLong run ATCEnvelope of short run ATC8-17Long-Run ATC CurveAverage Total CostsATC-1ATC-2ATC-3ATC-4ATC-5OutputAny number of short-run optimum size cost curves can be constructed8-18Long-Run ATC CurveLong-RunATCAverage Total CostsATC-1ATC-2ATC-3ATC-4ATC-5OutputThe long-run ATC curve just“envelopes” the short run ATCs8-19Long Run Production CostEconomies of ScaleLabor specializationManagerial specializationEfficient capitalDiseconomies of ScaleConstant Returns to Scale8-20Long-Run ATC ShapesOutputLong-run ATC curve where economiesof scale existAverage Total CostsLong-RunATCEconomiesOf ScaleConstant ReturnsTo ScaleDiseconomiesOf Scaleq1q28-21OutputLong-run ATC curve where costs arelowest only when large numbers areparticipatingAverage Total CostsEconomiesOf ScaleDiseconomiesOf ScaleLong-RunATCLong-Run ATC Shapes8-22OutputLong-run ATC curve where economiesof scale exist, are exhausted quickly,and turn back up substantiallyAverage Total CostsLong-RunATCEconomiesOf ScaleDiseconomiesOf ScaleLong-Run ATC Shapes8-23Industry StructureMinimum efficient scale (MES)Natural monopolyApplications and illustrationsPrice of cornSuccessful start-up firmsThe Verson stamping machineThe daily newspaperAircraft and concrete plants8-24Sunk CostsIrrelevant in decision makingCannot be recoveredDo not affect marginal benefit and marginal costFirm example:R&D costs8-25Key Termseconomic (opportunity) costexplicit costsimplicit costsnormal profiteconomic profitshort runlong runtotal product (TP)marginal product (MP)average product (AP)law of diminishing returnsfixed costsvariable coststotal costaverage fixed cost (AFC)average variable cost (AVC)average total cost (ATC)marginal cost (MC)economies of scalediseconomies of scaleconstant returns to scaleminimum efficient scale (MES)natural monopoly8-26Next Chapter PreviewPureCompetition8-27