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Econ 281 Chapter08
Econ 281 Chapter08
Econ 281 Chapter08
K
Q1
Q0
K1
K0
0
TC ($/yr)
L0 L1
TC = TC0
TC = TC1
TC1=wL1+rK1
TC0 =wL0+rK0
Q0
TC1/r
TC0/r
C2
0
Q0
C1
Slope=w2/r
C3
L
6
TC ($/yr)
TC(Q) old
300
200
Q0
Q (units/yr)
7
TC=wL+rK
TC=5(40)+20(10)
TC=400
Final:
TC=5(20)+5(20)
TC=200
TC ($/yr)
Change in Rent
TC(Q) initial
TC(Q) final
400
200
40
Q (units/yr)
11
MRTS=w/r
K/L=10/40
K=4L
Q=L1/2K1/2 =L1/2(4L)1/2
Q=2L
L=Q/2
13
K=4L
L=K/4
L=Q/2
Q=L1/2K1/2
Q=(K/4)1/2K1/2
Q=1/2K
K=2Q
TC = wL +rK
TC = 10(Q/2)
+40(2Q)
14
15
K (capital services/yr)
C1=Isocost
curve before
($200) and
after ($220) a
10% increase
in input prices
A
Q0
C1
L (labor
16
services/yr)
TC ($/yr)
Q0
Q (units/yr)
17
TC (Q)
AC (Q)
Q
18
TC (Q)
MC (Q)
Q
19
TC ($/yr)
TC(Q) post
TC0
Slope=LRAC
Q0
Q (units/yr)
20
AC, MC ($/yr)
MC
AC
Q (units/yr)
22
AC ($/yr)
Typical Economies of
Scale
Economies of scale
Diseconomies of scale
Q*
Q (units/yr)
26
Cost Function
Increasing returns to
scale
Economies of Scale
Decreasing returns to
scale
Diseconomies of Scale
Constant Returns to
Scale
IRS
Q = L2
DRS
Q = L1/2
Labor Demand
L*=Q1/2
L*=Q2
L*=Q
TC=wQ
none
wQ1/2
w/Q1/2
EOS
28
%TC
TC ,Q
%Output
TC Q
TC ,Q
Q TC
29
TC TC
TC ,Q
/
Q Q
TC ,Q MC / AC
30
Let Cost=50+20Q2
MC=40Q
IF Q=1 or Q=2, determine economies of
scale
(Let Q be thousands of units)
32
TC=50+20Q2
MC=40Q
AC=TC/Q=50/Q+20Q
Initially: MC=40(1)=40
AC=50/1+20(1)=70
Elasticity=MC/AC=40/70 Economies of Scale
Finally: MC=40(2)=80
AC=50/2+20(2)=65
E=MC/AC=80/65 Diseconomies of Scale
33
TC ($/yr)
TVC(Q, K*)
TFC
rK*
Q (units/yr)
35
TC2/r
TC1/r
TC0/r
K
Q1
Q0
Q0
B
Short Run
Expansion path
L
39
TC ($/yr)
STC(Q)
LRTC(Q)
A
rK*
Q (units/yr)
40
STC (Q)
SAC (Q)
Q
41
STC (Q)
SMC (Q)
Q
42
TFC (Q)
AFC (Q)
Q
TVC (Q)
AVC (Q)
Q
43
Note :
STC TFC TVC
STC TFC TVC
Q
Q
Q
Therefore :
SAC AFC AVC
44
46
$ Per Unit
AFC
0
Q (units per
47
year)
$ Per Unit
Average
variable cost
generally
decreases then
increases due to
economies of
scale.
AVC
AFC
0
Q (units per
48
year)
$ Per Unit
SAC is the
vertical sum
of AVC and
AFC
SAC
AVC
Equal
AFC
0
Q (units per
49
year)
$ Per Unit
SAC
SMC
AVC
SMC
intersects
SAC and
AVC at
their
minimum
points
AFC
Q (units per
50
year)
51
$ per unit
SAC(Q,K3)
SAC(Q,K1)
SAC(Q,K2)
AC(Q)
Q1
Q2
Q3
Q (units per
year) 52
$ per unit
MC(Q)
SAC(Q,K1)
AC(Q)
SMC(Q,K1)
A C
Q1
Q2
Q3
Q (units per
year) 54
$ per unit
Example: Putting It All
MC(Q)
Together
SAC(Q,K2)
AC(Q)
SMC(Q,K2)
D
0
Q1
Q2
Q3
Q (units per
year) 55
57
AVC
Cumulative Output
61
62